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SYLVAIN THÉRIAULT President of Desjardins Private Wealth Management

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I am pleased present to you the third print edition of Global Banking & Finance Review. For those of you that are reading us for the first time, welcome.

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In this edition you will find engaging interviews with leaders from the financial community and insightful commentary from industry experts. Featured on the front cover is Sylvain Thériault, President of Desjardins’ Private Wealth Management. The multidisciplinary team at Desjardins’ Private Wealth Management specializes in tax planning, portfolio management, business ownership and intergenerational wealth transfer and philanthropy. Sylvain Thériault discusses the challenges and trends facing wealth management in Canada. I hope you enjoy this interview and the other interviews as much as I did. For over 5 years, we have enjoyed bringing the latest activity from within the global financial community to our online and now offline readership. We strive to capture the breaking news about the world's economy, financial events, and banking game changers from prominent leaders in the industry and public viewpoints with an intention to serve a holistic outlook. We have gone that extra mile to ensure we give you the best from the world of finance. Send us your thoughts on how we can continue to improve and what you’d like to see in the future. Happy reading!

Wanda Rich Editor


Stay caught up on the latest news and trends taking place. Read us online Connect with us on Twitter: @GBAFReview, Google+ and Facebook: globalbankingandfinancereview

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The Gaming Education Paradigm


Sylvain Thériault President of Desjardins Private Wealth Management


Supporting Enterprise Financing in Vietnam


inside... BANKING 45 The enormous opportunity

BUSINESS 50 Monetising digital ecosystems

FINANCE 28 The Senior Manager’s Regime

Soumaya Hamzaoui, Chief Product Officer RedCloud Technologies

Catherine Robinson, Solicitor, Criminal Defence, Byrne and Partners LLP

in emerging market finance

63 Data Classification: The Modern Business Imperative

Stephane Charbonneau, CTO, TITUS


The digital experience

Nick Rappolt, CEO, Beyond

to drive future profitability Max Speur, COO of SunTec

106 Flexible Working Relies On Trust And An ‘Outcomes’ Focus

Andrew Moore, COO, DAV Management

116 The Opportunity for Outsourcing Considerations for Remittance Services Ted Sanchious, CTP, Vice President, First Data Remittance Services

143 Why Data is Key in the Age of Customer Obsession

Graham Lloyd, Industry Principal of Financial, Services at Pegasystems

a Game-Changer?

30 CRS Means Financial Institutions Need To Remain Flexible And Responsive

Valerie Oudet, Sopra Banking Software


The European infrastructure challenge: bridging the financing gap Michael Wilkins, Managing Director of Infrastructure Finance at Standard & Poor’s


Banking and Finance in Africa the players of the emergence Dhafer SAIDANE, Professor - SKEMA Business School, Adviser to the CEOs Club of African bankers


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CONTENTS From bowler hats to robots


Kenya a leading investment destination


Navigating Disruptive Innovation in Financial Services

Multi-channel banking why the role of the database is critical to delivery



INVESTMENT 20 Investing in climate change

TECHNOLOGY 66 We need to talk about legacy

TRADING 84 Why dollar demand will remain

Louise Ward, Investor Relations Director Low Carbon

Cliff Moyce, Global Head of Financial Services Practice, DataArt

33 Green bonds – from niche


128 Lucky 7,

solutions hits the mainstream

to mainstream

George Blacksell, Senior Researcher, Corporate Citizenship

94 The Collapse of Oil Price: Threat or chance?

Monica Defend, Head of Global Asset Allocation Research, Pioneer Investments

120 Bangladesh’s Future relies on more diverse trade

Alexander Rost, Regional Head Indian Subcontinent, & ASEAN, Commerzbank

IT architectures...

Keep on truckin’ -continuous forecasting makes business faster and surer

a dominant theme in 2016

Simon Derrick,Chief Currency Strategist, BNY Mellon

Kira Iukhtenko, Deputy Head of Analytical Department. FBS, Inc.

Jon Louvar, Director of Planning Strategy, the Hubble team at

110 Building

foundations for the future of finance Paul Moores, Director, Banking & Financial Markets, IBM Financial Services


Secure retailing six steps to make it happen Richard Cassidy, Technical Director EMEA Alert Logic


Testing Times – solving the cost conundrum in a disrupted market Peter Gould, Associate Partner at Orbium. Issue 3


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Banking in Macedonia

70 UAE Wealth Management and Home Financing



interviews... EMV IN THE USA 70

Ajay Bhalla, President Global Enterprise Risk and Security, MasterCard

For the last 15 years, MasterCard has been involved in the creation, management and development of the EMV standard. Global Banking & Finance Review editor, Wanda Rich spoke with Ajay Bhalla, president of global enterprise risk and security at MasterCard about the EMV rollout in the United States.

UAE WEALTH MANAGEMENT AND HOME FINANCING 100 Renoy Kundukulam, Head of Priority Banking Noor Bank and Pawan Dhawan, Head of Home Finance, Noor Bank

Noor Bank (then Noor Islamic Bank) was established when the global financial crisis broke in 2008. As a young, innovative and progressive bank with none of the legacy issues common among more established banks, Noor Bank was able not only to ride out the financial storm that engulfed the world but eventually thrive.

BANKING IN MACEDONIA 12 Mr. Vladimir Eftimoski, CEO, Stopanska banka a.d. Bitola.

Mr. Vladimir Eftimoski, CEO of Stopanska banka a.d. Bitola spoke with Global Banking & Finance Review about the banking sector in Macedonia and the banks operations.

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Europe 8

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Transforming the banking workforce through technology By John Weisel and Karl Meekings Banking is at an inflection point. Technology is revolutionizing the banking workforce – eliminating, changing and creating roles across the business – yet the complexion of the workforce feels remarkably similar to the one before the global financial crisis. This can’t last. If banks are to prosper, their transformation programs will need to focus as much on people as they do on processes and products. The challenge for banks is to understand where and how advances in technology will change roles. First, banks need review roles across the business to assess which tasks can be completely automated and which ones still require (or benefit from) human interaction. Second, many of the roles that remain will be increasingly dependent on technology, and employees will need new capabilities to operate in this technology driven environment. That, in turn, will demand that banks develop new approaches to recruiting and retaining talent with the skills required.

Transforming the workforce through automation

Opportunities exist for banks to eliminate many task-based roles through automation. This was reflected in EY’s European Banking Barometer – 2015, where 32% of senior banking executives surveyed believed that retail and business banking would experience a decrease in headcount, followed by other head-office functions (31%), and operations and IT (28%). Examples of task-based automation abound. One bank has introduced a robot worker programed to sense customer emotions and speak 19 languages, allowing it to greet customers and assist them with different services at the bank. Another bank recently announced the use of an artificial intelligence system, similar to those found in mobile telephones, that allows a robot to interact with customers and walk them through various basic tasks such as money transfers. As banks seek to enhance efficiency across the business, further automation of tasks is inevitable. Issue 3






There are a few steps that banks can take to plan for change and ensure that automation is managed efficiently and does not lead to a loss of skills or knowledge from the organization: „„ Establish a working group, including human resources personnel and technologists to map roles across the organization against the steps in each process to identify targets for automation. „„ Determine what controls must be instituted to manage the automated technology. „„ Develop plans to retrain and redeploy staff to other parts of the organization. 10

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Using technology to augment human performance

Technology will not completely eliminate the human element from banking. Although machines can perform certain technical tasks better than humans, others require a range of judgment and common sense that are challenging to automate. Some of these roles include research analysts, who can maintain relationships with executives at the companies they cover and interpret the nuances in their comments; call-center employees, who can use judgment to solve complex problems and engage with customers; and high-net-worth personal advisors, whose clients may continue to expect dedicated personal advice.

Where face-to-face contact with customers remains important, technology is critical to improving productivity. By providing advisors with tablets, banks have been able to reduce the risk of product mis-selling, reduce the time spent on paperwork, and provide customers with advice on a wider range of products. The increased use of technology will help banks manage the convergence of generations in the workplace. By 2025, millennials, or Generation Y will make up 72% of the global workforce. This generation is more digitally capable and eager to fully exploit technology’s full potential.

EUROPE BANKING At the same time, the knowledge and experience of Generation X and Baby Boomers will remain a cornerstone of successful banks. Banks will have to harness the best skills of each generation as they work alongside each other. Banks will have to assess each role carefully and determine how much personal interaction is required in each position compared to how much automation is acceptable. Banks should also assess how technology can enhance staff and enable them to do their jobs more effectively. Identifying and attracting new talent The pace of development in technology means banks will need employees with new and advanced skills. This talent will help banks stay at the forefront of innovation and manage the risks that may come with it. Innovative IT staff, including those who can develop artificial intelligence, will be in demand at banks as the work of bankers is increasingly automated or augmented by technology. New skills will be needed to develop and maintain the new technologies and monitor them to ensure they are being used correctly and safely. If new technological advancements are deployed carefully, regulatory scrutiny and customer concerns could outweigh any benefits. While banks are developing innovative new technology, they must also maintain legacy systems based on outdated technology. Banks will need to decide whether they can afford to hire or train individuals with the programming skills necessary to maintain these systems, or whether they want to outsource certain support functions. Whichever route banks decide to pursue, they have a talent challenge on their hands. The specialized IT and engineering graduates that banks will need are more likely to join a technology company than a financial services firm. According to Universum, there are no banks ranked by IT and engineering graduates in the top 25 most attractive global companies to work for, and just two in the top 50. This talent gap can be narrowed. Opportunities exist for banks to transform their employee value proposition, especially toward millennial employees, who EY research shows are attracted to companies whose values align with their own. Banks

should emphasize their purpose – how they make a tangible difference in the real world – when recruiting for these new roles.

Building the banking workforce of the future

Increasingly, banks need an adaptable, “intrapreneurial” workforce, with the diversity of thought that promotes innovation within the organization. Few have that workforce today. Most will have to build it. Those that do, and do so strategically and with purpose, will be better positioned to transform their workforce, stand out from their competition and be better placed to provide exceptional service to their customers. The traditional image of the banker once evolved from Mr. Banks, the bowler hatwearing father from Mary Poppins, to Gordon Gekko, in pinstripes and braces. |And now, once again, the banking workforce is undergoing a radical transformation. The banker of the future is more likely to be a young technologist, if not a robot, than a buttoned-up financier. Is the industry ready?

John Weisel (left) Global Advisory Services Leader EY

John Weisel is the Global Advisory Services Leader of EY’s financial services business. He has more than 25 years of experience providing advice to global banking and capital markets clients in strategic areas, including business and technology strategy, enterprise performance management, and transaction services.

Karl Meekings (Right) Global Banking & Capital Markets Strategic Analyst EY

Karl Meekings is a Global Banking & Capital Markets Strategic Analyst at EY. He is responsible for the development and communication of strategic thought leadership initiatives for EY's Banking & Capital Markets Sector. Issue 3




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Mr. Vladimir Eftimoski CEO Stopanska banka a.d. Bitola


MACEDONIA Mr. Vladimir Eftimoski, CEO of Stopanska banka a.d. Bitola spoke with Global Banking & Finance Review about the banking sector in Macedonia and the banks operations.

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I would like to underline that it is good that in such an economic situation the Macedonian banking sector has continued the trend of stability and has increased the level of liquidity


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EUROPE INTERVIEW What are some of the main challenges and opportunities that the banking sector in Macedonia is facing? The economic and financial turbulence on global level have their own influence over the situation in Macedonia and are, of course, one of the key challenges which the Macedonian banks are coping with. In conditions of uncertainty, all the positions in the work are placed in frames which should respond to the risks which may be imposed to the banks. In that regard, one should take into consideration the decreased economic activity, the worsened financial results of part of the business sector and the need of bigger liquidity. In fact, from a macro-economic aspect, it is clear that all financial subjects should follow the directions dictated by the economy and the financial situation in the country. The Macedonian economy is highly dependent on the occurrences in the Eurozone because it is our greatest trading partner. Therefore, in the past several years, including 2015, the key exterior factor whose impact was reflected on the domestic economic situation was the global economic and financial crisis. In the Q4 of 2014 there was a difficult recovery of the economic activity (the annual growth rate of the GDP in the Eurozone was 0.9%), the industrial production slowed down, and the inflation rate was negative for the first time since 2009 and was -0.2%. This situation, as you know, continued in the first half of 2009 when the GDP growth rate in the Eurozone was 0.4% in Q1 i.e. 1% on annual basis. With regard to the inflation, there is an evident mild improvement, so the data for June show annual growth of 0.2%. However, the inflation rate is still the main objective of the ECB and the programme for quantitative facilitation continues and will be implemented by the ECB until the end of September 2016.

In Macedonia the numbers show an increase of the GDP in Q4 of 2015 of 2.7% and an average negative annual inflation rate of


In the first half of 2015 the economic results show that the worsened economic trend continues. The average annual inflation rate was maintained on the level of 2015 and it was -0.3%. The GDP growth rate has also not marked any significant changes, so in

Q2 of 2015 it was 2.6% I would like to underline that it is good that in such an economic situation the Macedonian banking sector has continued the trend of stability and has increased the level of liquidity. This enabled monetary loosening by decreasing the basic interest rate of 3.50% to 3.25% which was maintained in 2015. The additional changes implemented into the monetary policy is stimulating the growth of loans and have provided support for the private

sector in conditions of decrease foreign demand which influenced the limitation of the growth in the domestic economy. The final product which we received was the increase of the assets at the level of the banking system by 8.33%, a growth of gross loans to non-financial subjects by 9.22%, increase in the deposits of the non-financial subjects by 10.67% and increase of the capital and reserves by 3.97% compared to the previous year. In that context more concrete challenges and opportunities are defined and these are the challenges which the banks in Macedonia are facing – how to use the increased liquidity in order to support the business and the economy. In that line, Stopanska banka a.d. Bitola marks a growth in the loan placement by 5.13% in the first semester of 2015 whereas the deposits of non-financial subjects were kept on the stable level achieved in 2014. The capital and reserves are increased by 12.99% which is a signal for an increased degree of capitalization of the bank. Being a leader in the banking services for the population, what initiatives do you think contributed to your success? Even in this period which was difficult for the global and domestic economic surroundings, Stopanska banka a.d. Bitola has successfully completed 2014 with 187.26 million MK Denars in profits i.e. 3.04 million EUR, after the taxation and calculated pursuant to the IFRS. This is three times more compared to the profits in 2013. This result owes to several factors. First, in 2014 we had bigger net incomes from interest by 161.45% compared to 2013. In the same period, we increased the incomes of accumulated and written off interest receivables in accordance with the agreement for liabilities settlement with a value of 4 million EUR. In the past year, the Bank invested all its funds and resources to improve the quality of the services it offers to its clients through analysis of their needs, and with the purpose of creating an offer of services and products pursuant to the specific needs of each client. As a result of these efforts, in 2014 the Bank increased the number of clients, the scope of crediting and the works in the payment system. All these initiatives, together with good expenditure management, have positively reflected on the net incomes of commissions and compensations which were increased by 10.99% compared to 2013. In this period the net incomes of rate-exchange differences mark an increase of 12.87 million MK Denars and are bigger than 2013 by 70.03%. The remaining incomes of the activities are doubled compared to the ones accomplished in 2013. This increase mainly owes to the profit made from the sale of part of the property. This position includes the incomes of investments in shares of investment funds, as a more profitable alternative compared to the investment in long-term national securities out of which in 2014 the Bank has gained an amount of 1.46 million MK Denars. The number of employees was increased as a result of the increased number of clients and the increased activity in 2014. The Bank expanded its network of branches and ATMs which cause increase of the expenses for employees by 15.08%, the remaining expenditures of the activity were increased by 20.31% whereas the depreciation was higher by 16.27%. In the first semester for 2015 the trend of growth of the Bank continues, and so the expenses for the employees mark an increase of 13.22%; the remaining expenditures of the activity are increased by 6.04% whereas the depreciation is higher by 13.22%. Issue 3



In parallel with the increased scope of clients the Bank was also active in line of expanding the network of branches and ATMs. In that line, annually, the network of branches was increased by 26.67% in 2014, while the ATM coverage on the territory of Macedonia marks a growth of 41.18%.

When it comes to the increase of the client base, the contribution of new clients – individuals are especially important – compared to 2013 it was 6.16%, a trend which continues in the first semester of 2015 with an increase of 1.07%. The positive changes within the clients’ base additionally contributed to the increase of 49.76% of the gross loan portfolio of individuals in 2014 compared to 2013 i.e. a growth of 6.92% in the first semester of 2015. The growth of gross loan portfolio of individuals positively reflected on the net incomes of interests which in 2014 were bigger by 192.94% compared to 2013 i.e. 269.59% in the first six months of 2015 compared to the same period in 2014. Having in mind the conditions of the economy in the country, I am especially glad to underline the support which the Bank is giving to the individuals by approving self-employment loans, a project realized in cooperation with the appropriate competent institutions in Macedonia. Moreover, there is an appropriate growth within the incomes of commissions from individuals which were increased by 9.40% in 2014/2013. The growth on this position in the first semester of 2015 compared to the first semester in 2014 was 7.10%. I reckon that this growth is mostly owing to the unique approach which we as a Bank have towards our clients and is a result of the commitment of each of our employees towards every existing or new client. The fulfilment of the requests and meeting the needs of our clients are our obligation! Namely, every individual who accesses as a new client in our Bank with the very act of signing becomes our highly appreciated client who receives highly qualitative and professional services. 16

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Which unique products and services were created as a direct response to the needs and desires of the clients? In the past period the Bank is recognized as a stable and secure financial institution. The professional working and the good reputation have contributed to the growth of the deposits of the individuals, an increased number of loans and reinforcement of the market position. Working with clients (individuals) is in the primary focus of Stopanska banka a.d. Bitola. The objective of the Bank is to provide maximum support to the individuals with an acceptable and reliable business idea when adopting the financial decisions referring to providing additional funds with low interests, as well as long-term loans. We offer friendly advice when investing their surplus of funds in specially created deposit products, which are, of course, in line with the prudent risk management. The unique approach which we as a Bank have created towards our clients contributes for each client to be able to get all necessary information and to meet their needs in one place which is a special advantage, taking into consideration the dynamics of the contemporary living. The professional relations and the qualitative service towards every client are our single obligation. The Bank is continuously working and investing its funds and resources to improve the quality of the performed services, makes analysis of the client when preparing the offer and works on the engineering of new competitive products and services which will be fully responsive and in accordance with the needs and nature of the population.


In this part I would like to emphasize that this is a permanent and inevitable process. During 2014 as a result of the agility and flexibility, the conditions and prices of the products and services of Stopanska banka Bitola were continuously harmonized with the conditions on the market, the needs of the clients and the competition. Technology plays an important part in the banking. How does Stopanska banka a.d. Bitola cope with the challenges of the development of information technology? The continuous progress and application of information technology in the everyday life imposes a need of expanded palette of products and services coming from the banks in electronic form and will be user-friendly for the business people who have less and less free time. The industries which desire to be more competitive and easily available for their clients will need to adjust to these changes. The adjustment includes creation and application of innovative, easily available and automated processes and solutions in the everyday life, with an increased saving of the direct use of human capital. Stopanska banka a.d. Bitola during this and in the past year has implemented several activities and projects for development and upgrade of the applicative systems in line of implementation of the regulatory terms, meeting the mandatory standards and regulations of the Bank and the recommendations given by the audit; achieving competitive advantages; rationalization and optimization of the business processes and harmonization within the frames of the Bank; upgrade of the IT infrastructure (system, communication, data base, as well as security information). These changes and improvements of the existing IT systems have enabled conditions for efficient monitoring of the market and the scope of the work and easy adjustment of the Bank to the changes in the organization and regulation. The bank is permanently expanding its ATMs network, as well as their upgrade with new services. This is one of the two banks in Macedonia which have started the M-payment project. This was initiated towards the end of 2014 and we expect it to be finalized towards the end of this year. The relations with the clients plays an important part in banking. What are the initiatives you have included in order for the clients to continue getting the best services? The clients are always in the focus of the bank. During its existence Stopanska banka Bitola managed to establish close connections to its clients. The maintenance and deepening of these relations is a primary objective of the Bank. This is recorded in its heritage, tradition, culture, as well as in its future working. In order to achieve a higher level of services for the clients, the Bank managed to upgrade its internal educational programmes

and the training programmes in cooperation and with the support from external companies specialized for training. In that line, in 2014 the Bank started an intensive realization of the project for talent management by organizing and implementation of unified professional assessment of the leading personnel and preparatory activities of the bank for implementation of a new system for monitoring and assessment of the performances of the employees by defining the objectives. The more significant internal trainings in the bank include: seminars for the new employees, trainings for the organizational culture and professional behaviour, covering the ongoing changes of the legal regulation and current trends regarding the news in the offer of products and services, improvement of soft-skills of the employees, as well as experts’ training for internal transfer of know-how in different areas in the banking. The relations of the Bank with the clients are based on contemporary approach in the human resources management. The maintenance and reinforcement of the human capacities is done with appropriate engagement of employees, valuation of their performances and results, promotion and upgrade, systematic approach towards accomplishing professional specialization and training of the employees. These are the main tasks and activities in the field of personnel management of the Bank. At the same time, our employees are always timely acquainted with all aspects and details around the new services and products which the Bank is placing on the market, all in order to provide qualitative and timely service to the clients. Do you have any ongoing projects which you would like to share with us? Following the world trends of globalization which are present not only in the finance sector, but also in all other sectors of the economy, we are aware that Macedonia, being a small open economy, will not be bypassed by these processes. In Macedonia and the region there are several banking brands which additionally put pressure on the competition, but also over the fast tempo of the globalization. Being aware of this unstoppable process, and led by the experience of the managing team of the Bank, we are intensively working on being well prepared to tackle these processes. As for myself, in my 17 years of banking experience, gained in international banking trends, I have passed through these processes and I know their importance. It is a fact that in the moment the world economy and the finance sector are still in a global crisis which slows down this process. Here we can see our biggest advantage, to be sufficiently fast and flexible, in order to use this vacuum period for reorganization and consolidation in order to attract a foreign strategic partner who would be interested in presence of the Macedonian market. Issue 3


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The most optimistic expectations are that the financial markets, especially the market of capital will start recovering towards the end of 2017. The consolidation process, cleaning out the bad placements and reorganization started in 2013, which resulted in excellent achievements in 2014. We plan to use 2015 and the following two years for more efficient acting on the domestic and foreign markets in order to attract a foreign strategic partner. Knowing the deliberation and reservations which the investors have, this process would be a gradual one: First, by attracting a credit line with a longer repayment period; then, in the form of subordinated debt to make efficient use of the time for them to meet the Bank and its processes. In the end, our primary objective i.e. primary project is our complete consolidation and reorganization which will enable us to function as a modern bank which will be able to compete with the world banking trends in line of attracting foreign financial strategic partners. In which way is Stopanska banka a.d. Bitola providing support for the socio-economic development in Macedonia? One of the strategic objectives determined with the business policy and the development plan of the Bank is to take consistent care for the social good. In accordance with this strategic determination, the Bank in 2014 was constantly and actively included in the different projects and activities of public and social nature. „„ In 2014 the Bank continued its long-term tradition with humane character to help the protégés in the Primary School “Gjorgji Sugarev” in Bitola; „„ Stopanska banka a.d. Bitola donated funds for construction of the temple “Ss. Konstantin and Elena” in Skopje; „„ Stopanska banka a.d. Bitola supported the International youth art-festival “Bitola – an open city”; „„ The bank sponsored the equipping of the city pool “Atina Bojadzi” in Ohrid; „„ The bank gave donation to the Association of children with autism and the children with Asperger’s Syndrome.

The activities of public and social nature have continued in 2015 when the Bank was included in providing help for the flooded areas in the Pelagonija region. Furthermore, the support which the bank is providing to the development of the culture and sports is not lagging behind. What are your future plans for development? If I say that we should grow, because we are a medium bank on the level of the banking sector in Macedonia, this will not be the most precise definition of the plan for development of Stopanska banka a.d. Bitola. Our objective is to continue the trend for growth of the crediting scope in healthy and sustainable business projects, which will improve the economic position of Macedonia. Our goal is to gain bigger trust within the clients and to use it, in order to increase the overall capital of the Bank which will be placed into the function of the business. These are the more general goals, but they are presented in details in several business plans and policies of the Bank, which are very ambitious. In the very end, I would conclude that a given banking and financial system does not recognize small or big, but good or bad, successful or unsuccessful. Therefore, our primary goal is to be good and successful, and of course, to always improve and upgrade in all segments of our work, such as relations with clients, the offer of products and services, relations towards the community, etc. In any case, we must not forget the investments in the employees and managers.

We are especially proud of the cooperation which the Bank has with the Association of children with autism and Asperger’s syndrome because the constant support which we are providing is promoting and animating their creativity and talents through adaptation of their drawings and other pieces of art into the marketing materials of the Bank. Unlike the other banks in Macedonia, Stopanska banka a.d. Bitola has its head-quarters beyond the capital. This is a great advantage, but of course, and a big responsibility for the bank to aid the local economic development in the South-West region of Macedonia. With its projects and plans, the Bank is actively included in supporting the small and medium businesses, and of course, the agriculture sector, which is one of the main activities of the population in this region. Issue 3



Investing in climate change solutions hits the mainstream Louise Ward, Investor Relations Director at renewable energy investment company, Low Carbon shares her thoughts on why the finance community should aim for more responsible investments in order to create a low carbon future, and for impressive returns.

Louise Ward Investor Relations Director Low Carbon


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As the increasingly popular divestment ‘movement’ continues to gather pace, as well as global attention, investors today need to both look ahead for opportunities for growth, and anticipate the solid returns that come from divesting stocks and equity from the fossil fuel industry and reinvesting into climate solutions such as solar PV and onshore wind. This is even more poignant following the deal made at the Paris Climate Conference (COP21) in December last year, which commits governments to holding the increase in the global average temperature to well below 2 degrees above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees above pre-industrial-levels.

Education is key

A flick through the papers will clearly tell you that divestment is a hot topic that is generating widespread, global, attention. Furthermore, the movement has public backing from high-profile and high networth individuals, institutions and political entities such as universities, the Norwegian government and The Rockefeller Foundation. Such an overwhelming level of endorsement and positivity around divestment is hard to ignore, and should not be underestimated as a viable and effective weapon in the global fight against climate change. This is not just a case of ‘tree-hugging’ – divesting and reinvesting into climate change solutions can also bring with it tangible financial returns. The government and the energy and investment industries need to do more to educate institutional investors as to the substantial and low-risk returns that can be achieved from climate solution projects such as solar photovoltaic


The government and the energy and investment industries need to do more to educate institutional investors as to the substantial and low-risk returns that can be achieved from climate solution projects such as solar photovoltaic (PV) and onshore wind.

(PV) and onshore wind. Overall, this is a question of raising awareness around these alternative investments, which can both improve the UK’s energy mix as a whole and significantly reduce carbon emissions. If we want to move to a low-carbon economy, it’s evident that we need to invest more heavily into low-carbon assets.

Reliable technologies generate reliable returns

There’s no two ways about it – renewable energy technologies have a strong proven track record that’s crucial to delivering impressive returns and high levels of confidence for the savvy investor. For instance, solar PV panels have been actively generating electricity for at least twenty years, and the scale of solar PV projects and investment in them has increased dramatically during that time most notably in the past three years where capacity has more than tripled. The result of this increase in confidence can be seen through steps that corporate giants such

as Apple and Facebook have taken recently, pledging that they will be investing in solar PV to power their data centres and offices. Onshore wind power is another example of a renewable energy technology in its twentieth year, was described by the Department of Energy and Climate Change (DECC) as ‘the leading individual technology for the generation of electricity from renewable sources during 2014’. The myth that climate solution technology is too ‘new’ or ‘unproven’ is just that- a mythand the statistics are there for all to see. Over the last few months, we have been seeing a dramatic drop in the price of oil, which has only highlighted its volatility. Climate solutions, on the other hand present a strong contrast to this predicament, as they are not volatile to the same extent and their marginal cost of energy production is zero. No other power generation plant (oil or gas) can say the same. And even if investors don’t actually believe in climate change, these

investments in climate solutions stand up on their own financially. They are generally long-term, inflation-linked contracts which generate attractive and solid returns. The majority of climate solution projects are, essentially, infrastructure projects. In fact, the words ‘green’ or ‘renewable’ don’t often have to be mentioned at all, which can be the difference in convincing reluctant investors of their viability as reliable investments. In truth, 40% of electricity demand has been met by renewable energy generation in recent years, which indicate that these technologies are a core, resilient electricity source that are here for the long-term.

The new wave of investors

A recent report - “Investing in a time of Climate Change” – which was commissioned by global investment consultancy firm, Mercer, states that we need institutional investors to take the on role of a ‘climate aware future makers’. Issue 3



This group consists of pioneering investors who understand how climate change is going to affect our world, and who can lead the way in showing more risk-averse investors on how to invest in climate solutions. Future makers realise that our FTSE 100 will not always be dominated by fossil fuel giants such as BP and Shell, and that renewable energy companies will soon make their way into the mainstream market, and stay there. Lastly, a climate aware future maker will seek to apply the use of their personal, individual investments to his/her business life as well. They will see that if they are making such impressive returns from the solar PV installed on their household roof, for example, then there is a huge potential to make money from investing in solar PV projects at scale, in the business world. A big drawback is that there is currently no legislation here in the UK that is actually motivating investors into investing in climate solutions. In neighbouring France, however, things are changing. The French government is now calling on institutional investors to both disclose and measure the carbon intensity of their investment portfolio, and similar measures are also being taken informally in parts of Scandinavia. I hope to see this call to action and level of engagement imitated by governments in the UK throughout

the whole of Europe. If this happens, it will ultimately create a more mainstream and positive climate solution investment environment for future generations, and will assist in initiating more climate aware future makers for the task ahead.

Divestment: a new era

It’s clear that divesting from fossil fuels and reinvesting into climate solutions has its obvious benefits, as ultimately this can help combat the negative effects of climate change whilst generating attractive, stable returns for the most innovative and forward-thinking of institutional investors. These technologies are not a ‘gimmick’ that will pass. Investing in climate solutions presents strong growth opportunities for both now and for future generations. We have some of the sharpest financial brains in the world, right here in the UK, so no ‘problem’ is too large, or should be overlooked because it’s not the status quo. Additionally, global governments have promised to take action following the negotiations at COP21, and so the UK cannot and should not be seen to fall behind on this, but should lead the way for the entire world. Ultimately, we hope to see more investors and financial institutions leading the way in educating the industry on the true benefits of climate solution investment, in the dawn of the era of divestment.

Future makers realise that our FTSE 100 will not always be dominated by fossil fuel giants such as BP and Shell, and that renewable energy companies will soon make their way into the mainstream market, and stay there.

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A whistleblower is any person that has disclosed, or intends to disclose, a reportable concern to a firm, or to the FCA or the PRA, or in accordance with the Employment Rights Act 1996 (the “Act”).


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New whistleblowing framework The FCA and PRA recently published new rules on whistleblowing to complement their initiatives to change senior management arrangements and remuneration in the financial services industry. Are you affected?

The new rules will apply to UK deposittakers with assets of £250m or greater, including: „„ banks; „„ building societies; „„ credit unions; „„ PRA-designated investment firms; and „„ insurance and reinsurance firms within the scope of Solvency II and to the Society of Lloyd’s and managing agents. The rules will operate as non-binding guidance for all other firms regulated by the FCA or PRA. Affected firms will be required to: 1. appoint a “whistleblowers’ champion”; 2. put internal whistleblowing arrangements in place that are able to handle all types of disclosure from all types of person; * 3. provide training and development on whistleblowing including for all UKbased employees, all managers of UK-based employees wherever the manager is based and all employees responsible for operating the firm’s internal whistleblowing arrangements; 4. tell UK-based employees about the FCA and PRA whistleblowing services; * 5. require its appointed representatives and tied agents* to tell their UKbased employees about the FCA whistleblowing service; 6. inform the FCA if it loses an employment tribunal* case with a whistleblower; 7. present a report on whistleblowing* to its board at least annually; and

8. include a term in all settlement agreements to the effect that nothing in the agreement prevents the worker from making a protected disclosure. There is no legal duty on a firm’s staff to blow the whistle. A whistleblower is any person that has disclosed, or intends to disclose, a reportable concern to a firm, or to the FCA or the PRA, or in accordance with the Employment Rights Act 1996 (the “Act”). A reportable concern is a concern held by any person in relation to the activities of a firm including: a. anything that would be the subjectmatter of a protected disclosure as defined in the Act, including breaches of rules; b. a breach of the firm’s policies and procedures; and c. behaviour that harms or is likely to harm the reputation or financial well-being of the firm. Both definitions are far broader than the Act’s whistleblowing provisions. For example, interns, contractors, and those employed by third parties, even competitors, can be a whistleblower.

Whistleblowers’ champion

The FCA expects that a firm will appoint a NED as its whistleblowers’ champion (the title is not obligatory). A firm that does not have a NED is not expected to appoint one just for this purpose.

The whistleblowers’ champion: 1. should have a level of authority and independence within the firm and access to resources and information sufficient to enable them to carry out that responsibility; 2. need not have a day-to-day operational role handling disclosures from whistleblowers; and 3. may be based anywhere provided they can perform their function effectively.

An insurer must appoint a director or senior manager as its whistleblowers’ champion. A firm must allocate to the whistleblowers’ champion the responsibility for ensuring and overseeing the integrity, independence and effectiveness of the firm’s policies and procedures on whistleblowing including those policies and procedures intended to protect whistleblowers from being victimised because they have disclosed reportable concerns.

Side effect of SMR clawback provisions

As previously mentioned, the Bonus awards for senior managers will be subject to a minimum clawback of 7 years from the date of the award. This is extendable for up to 3 years where there are outstanding internal or regulatory investigations at the end of the 7-year clawback. The lengthy deferral period could discourage some senior managers from blowing the whistle. Issue 3




The rules will come into force on 7 September 2016. The responsibilities of the whistleblowers’ champion include oversight of the firm’s transition to its new arrangements for whistleblowing from 7 March 2016, the date the rest of the Senior Managers Regime will come into effect.

The FCA will consult on the application of these rules to UK branches of overseas banks. Once the rules have been in effect long enough for the FCA to assess their effectiveness, the regulator will consider whether similar requirements should be applied to other firms it regulates, such as stockbrokers, mortgage brokers, insurance brokers, investment firms and consumer credit firms.

Suggested actions

„„ appoint and train a whistleblowers’ champion in time for 7 March 2016; „„ allocate to the whistleblowers’ champion the responsibilities referred to; and „„ give the whistleblowers’ champion access to appropriate resources, including independent legal advice, to ensure you beat the 7 September 2016 deadline.

Regulatory references

The FCA and PRA have set out proposals for regulatory references for candidates applying for: „„ Senior management functions under the SMR; „„ Significant harm functions under the Certification Regime; „„ PRA senior insurance management functions (SIMF) under the Senior Insurance Managers Regime; „„ FCA insurance controlled functions; „„ Notified NED roles within a Relevant Authorised Person or Solvency II firm; „„ NED roles in credit unions; and „„ Key function holders and notified NED roles within an insurer. Consultation ends on 7th December 2015 and the new regime will apply from 7th March 2016.

Raymond Silverstein


Raymond Silverstein is Head of Employment, London at Browne Jacobson LLP a top 50 UK law firm which deals with multijurisdictional matters including banking and financial services dispute resolution, asset tracing, enforcement and recovery, restructuring, insolvency, bankruptcy and fraud.

In contrast to the U.K., 5 senior bankers and one prominent investor in Iceland recently received prison sentences for offences related to the 2008 financial crisis. 26 bankers have been imprisoned there to date for a total of 74 years following convictions for financial crimes perpetrated in the period. It remains to be seen whether these new regimes will result in the FCA holding more senior managers, including the most senior, to account.

Head of Employment, London Browne Jacobson LLP

Source: in bold are as published in FCA Policy * words Statement PS15/24

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The Senior Manager’s Regime a Game-Changer? March 2016 herald a seismic shift in regulation of the financial sector with the introduction of the Certification and the Senior Managers’ Regimes for UK banks, building societies, credit unions and PRA-designated investment firms. While the current regulatory climate relies on a regulator’s assessment of fitness and propriety of an approved person, the introduction of the Certification Regime will mean that firms will be given the responsibility of assessing the fitness and propriety of staff who hold ‘significant harm’ functions (generally investment advisers, brokers or staff that administer benchmarks)1 at the point of recruitment and on an ongoing (annual) basis. It is likely that the regulatory net will also catch a significantly higher number of financial services staff than were previously subject to the approved person scheme. 28

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Previously, those in management positions generally held one of many controlled functions (and often significant influence functions) which are described in detail in the FCA Handbook. However, the practical division of responsibilities within many firms was often perceived to be needlessly vague and complex despite the duty on firms to: take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among its directors and senior managers in such a way that: 1. it is clear who has which of those responsibilities; and 2. the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant senior managers and governing body of the firm.2

Under the new Senior Managers’ regime, 17 Senior Management Functions are specified, and firms will have to ensure that staff holding those Functions are pre-approved by regulators. Some of the functions will exist in larger and smaller firms, but others will be relevant only for smaller firms. Within the Functions are 30 Prescribed Responsibilities covered by the FCA and PRA Rules. The Responsibilities draw a distinction between executives and NEDs. Prescribed responsibilities include: Chief Risk Function, Head of Internal Audit and Compliance Oversight and there is also provision for individuals with overall responsibility. Often these people will already be caught by the approval process set out in the Functions, but firms will have to identify any other individuals who have overall responsibility for an activity, function or area, in the FCA’s words


“the person who has ultimate responsibility, under the governing body, for managing or supervising a function; with direct responsibility for reporting to the governing body, and putting matters for decision to it.”3 By putting the responsibility on firms to detail the areas of responsibility for each Senior Manager, the regime effectively ensures that when it comes to determining who is responsible for regulatory failings, a firm’s colours are nailed to the mast. This gives certainty to the firm in terms of identifying who the buck stops with and should result in more effective governance and monitoring of the way the firm manages its employees. But Senior Managers will be rightly alarmed by the rigidity in this framework and will be particularly keen to ascertain exactly who and what they manage. In large institutions, the responsibilities will be vast and probably more concentrated among fewer individuals. Senior Managers will be nervous about sharing certain Prescribed Functions with colleagues (the FCA is likely to consider such people jointly responsible) and keen to ensure that they know exactly which employees (especially those requiring Certification) they are responsible for. With respect to misconduct under the Financial Services and Markets Act 2000 (“FSMA”), under which the FCA can issue financial penalties, it was widely perceived to be difficult evidentially to bring action against Senior Managers for failings that had occurred within a firm due to the difficulty in establishing personal culpability, i.e. that the “standard of behaviour was below that which would be reasonable in all the circumstances at the time of the conduct concerned”. 4 This was highlighted in the recent report into the then FSA’s enforcement response to the collapse of HBOS undertaken by Andrew Green QC. The net result of Enforcement action was a prohibition and £500,000 penalty against Peter Cumming, the then chief executive of HBOS’ Corporate Division.

The report observed that a number of Enforcement staff had emphasised fairly that disciplinary and prohibition proceedings against senior managers were viewed as extremely hard to win. Green QC noted the caution and the observation of the Manager in Enforcement that “we satisfy ourselves that we have a reasonable prospect of succeeding and getting a good result from an investigation before we investigate” but concluded that this caution did not justify pursuing only Mr Cumming. 5 It was perhaps within this context that the amendments to “misconduct” under the Financial Services and Markets Act 2000 (under which the FCA can bring regulatory action and issue financial penalties) initially shifted the burden of proof to the Senior Manager to establish that, where a contravention occurred in an area in which the Senior Manager had responsibility, the Senior Manager had to satisfy the FCA (on the balance of probabilities) that s/he had taken such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring or continuing. With the reverse burden now removed from the proposed legislation so that the FCA has to make a positive case of failure to take reasonable steps against the Senior Manager, one might fairly ask whether the amendments make any practical difference to the current state of play with respect to regulatory actions for misconduct as the Statement of Principle of Approved Persons (5) which relates to those with significant influence functions sets out a largely identical responsibility6 and under the current regime, action for misconduct can be taken for a breach of Statement of Principle. In fact, the FCA Handbook gives some specific detail as to the kind of behaviour which could constitute a failure to take reasonable steps at APER 4.5.2-4.5.9, which will likely continue to be instructive. In summary, the Senior Managers’ regime will undoubtedly ease the evidential burden on the FCA at the outset of its investigations and may be an effective tool in the FCA’s arsenal. The deterrent effect will be high especially in the context of steadily growing financial penalties. Since 2010, these penalties have been pegged to percentages (reflecting seriousness of misconduct) of total

remuneration and Senior Managers will be keen to understand the current proposed clawback provisions for bonuses. What will be interesting to watch in this new climate will be the interplay in disciplinary actions against senior managers and those that they manage. The FCA is still fighting to overturn the ground-breaking Court of Appeal decision in FCA v Macris,7 which saw the floodgates for third-party rights open. If a Senior Manager’s disciplinary action is contingent, as many of them will be, on an employee’s or several employees’ alleged misconduct, to what extent will the employee be given rights to make representations in the Senior Manager’s proceedings? To what extent will the disclosure obligations on the FCA under section 394 of the Financial Services and Markets Act 2000 (which does not appear currently to be the subject of any FCA issued guidance or policy statement) allow Senior Managers to access the employee’s records to fairly defend their own state of knowledge of the employee’s activities? And to what extent will the assertion of failing to take reasonable steps by a Senior Manager mitigate their employee’s conduct? It will be an interesting time.

Catherine Robinson Solicitor, Criminal Defence Byrne and Partners LLP Source: 1 CP15/22 FCA Consultation Paper 2 FCA Handbook SYSC 2.1.1 3 FCA CP15/22 Strengthening Accountability in banking:

4 5 6


Final Rules and consultation on extending the Certification Regime to wholesale market activities (FCA) (July 2015) p.14 FCA Handbook DEPP6.2.4G Green QC, A Report into the FSA’s enforcement actions following the failure of HBOS (FCA) (November 2015) p.6 An approved person performing an accountable significantinfluence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function is organised so that it can be controlled effectively. [2015] EWCA Civ 490

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CRS Means Financial Institutions Need To Remain Flexible And Responsive

Valerie Oudet Sopra Banking Software

Valérie Oudet at Sopra Banking Software discusses how the new CRS (Common Reporting Standard) presents a major new regulatory issue for financial institutions The mission of the Common Reporting Standard (CRS) is, as the name suggests, to govern exchanges of information in tax matters between countries and, more specifically, between countries’ tax administrations. The idea is that by automating and standardising these exchanges, CRS will make it more streamlined between all the countries concerned through simple rules that everyone follows – and therefore, at lower cost. The problem, however, is the “common” bit – as in reality “common” reporting stops at exchanges between countries. When it comes to the implementation of data collection within a state, the standard leaves each country to determine itself how to best organise it. Indeed, the OECD’s current position on the matter couldn’t be clearer: it does not intend to interfere in the methods used locally. The “common” bit may be a while in coming 30

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As a result, for financial institutions responsible for reporting such information, things are more complex than it would seem. While the standard, or more precisely, the format the standard defines may appear to be the right path to follow, each country is in reality, entirely free to select the resources used. Thus one nation might decide to supplement the data collected to enhance its own data collection, meaning the data sent between countries must be purged of any specifically domestic aspects. Similarly, a jurisdiction may require its “contributing” financial institutions to make the files transferred secure, mainly to ensure data confidentiality, as the CRS indicates. As a consequence – and consistent with what the IRS put in place for institutions meeting the FATCA’s model 2 IGA Intergovernmental Agreement, which sends it files directly, different tax jurisdictions can request files to be encrypted, compressed, signed and/or dispatched using methods which themselves are entirely a matter of free choice – and are absolutely not “standardised”. Hence the idea of common reporting, laudable as it is, loses a little of its sheen: what we’re actually getting is a succession of special cases to be managed. At the time of writing, for example, only the UK’s published a first draft of the form CRS might take within its regulations. Other signatory countries, including those committed to reporting in 2017, are still nowhere near and the outcome remains in the balance.

So, some practical actions are required at the individual country level. For some countries, it may be completely appropriate to re-use processes put in place for FATCA for CRS reports, especially so as to ensure the security of data sent and the methods used to send it. On the other hand, other countries are obliged to revise their processes in order to meet the need to manage multiple receiving countries for example. Moreover, where financial institutions directly submit FATCA reports to the IRS, they need to organise and build their central data collection (and data dispatch to partner countries functionality) platform from scratch.

The way to a truly standard response

Facing this broad field of possibilities, constrained as we are by imminent deadlines, the challenge for the reporting team is to find both greater flexibility and more standardisation options. Meanwhile, coping with the various scenarios each of the 79 signatory CRS countries (in February 2016) will outline in the months to come requires a maximum level of uncomplicated adaptability. To achieve this, implementation of reporting should be approached in a standardised manner. Furthermore, if a group has more than one reporting financial institution, it is not unusual for several information systems to be involved. In such cases, each system will need to be adapted and enhanced to enable reliable identification of the third parties and accounts/ agreements to be reported.


Here, too, we can see the benefit of being able to rely on a single solution, able to deal with all the complexity of the standard’s reporting function, with threshold calculation post-collection, plus managing acknowledgements of receipt by country, getting correctly referenced and amended reports (occasionally several over the months and years following the first report), and so on. For financial institutions, the common standard may take on various forms, depending on the countries in which the institutions are based. Only a sophisticated level of configuration in any CRS IT solution implemented will enable quick application and therefore swift compliance, clearly. This requirement also demands great agility from your software provider or in-house team in order to develop enhancements to the configuration options. Indeed, from the point that you become aware of any special reporting features laid down by relevant countries, you will need a guarantee that your solution will be able to meet the new requirements with the greatest possible flexibility and responsiveness. Standardisation will, however, be all the more successful if it includes a medium- to long-term view. Although the reporting function is essential to ensure compliance, it does, nonetheless, represent a substantial investment – and this investment will only pay off if the guiding principles and development of the solution are based on a long-term view so as to always cope with changes in regulations and in individual country procedures that might result.

Next steps after CRS

The good news is that once CRS has bedded down, it will probably be, as envisaged, quite natural, simpler and cheaper for countries to use just one report, for the income of foreign residents and of domestic nationals alike (e.g. the IFU in France). CRS will then actually make sense – gradually becoming the norm for sending all such tax information. Even if it does still need a few extra standardised data items to be added to reach this point! For financial institutions, then, an efficient approach is to manage CRS reports and domestic tax reports with the same IT system so as to minimise mediumand long-term costs plus to ensure data quality and consistency. And building an appropriate CRS solution, like the choice of solution provider, must take such future developments into account.

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Green bonds – from niche to mainstream World leaders assembled at the Paris Climate Summit last December and committed to hold the increase in the global average temperature to well below 2ºC above pre-industrial levels. But what might their commitments mean for the investment community? Green bonds seek to channel finance into environmentallyfriendly projects – and provide a reliable return that creates a positive environmental impact to match. Whilst for years they’ve languished as a niche concept, they could be about to hit the mainstream.

The Rise of the Green Bond

The emergence of the green bonds market has been recognised by the United Nations as representing “one of the most significant developments in the financing of low-carbon, climate-resilient investment opportunities”. This investment product is still in its early stages. But, estimates for

the issuance of green bonds in 2016 range from $50bn from Moody’s Investor Services (a modest $8bn increase from last year), a $100bn mooted by the Climate Bonds Initiative to $150bn predicted by Bank of America Merrill Lynch. This still represents a tiny fraction of the $100trillion bond market, so why all the fuss? Their exponential rise (issuance has almost quadrupled from 2013 -2015) and some recent key developments, all point towards some real potential. Green bonds are distinct from their conventional counterparts as they are fixed-income debt instruments (or IOUs) whose funds are ring-fenced for projects with a clear environmental benefit, e.g. climate change prevention and adaptation initiatives. Traditionally, their issuance has been the preserve of international financial institutions, originating from the European Investment Bank’s (EIB)

first Climate Awareness Bonds in 2007. Recently, however, there have been some new entrants to the market, in the form of corporate issuers.

Corporates: New Kids on the Block

The first large company to dip their toe in the water was a Swedish real estate business, Vasakronan. They committed to create a special account for the net proceeds of their green bond issue. This account would be used to fund eligible projects, with the defined list ranging from sustainable property construction (LEED and BREEAM certifications) to energy efficient IT solutions. Stockland, a leading Australian real estate company, soon followed suit issuing a seven year green bond for buildings highly rated by the Green Star sustainable building certification. Stockland also committed to public annual reporting on the bond issue. Issue 3


“Great results emanate from a passion for small details�












$1.5bn GREEN BOND Since then, the likes of Lloyds Bank, Toyota, Barclays, Unilever, Solar City and ING have all jumped in. Apple hit the headlines in February 2016 with a $1.5bn green bond dedicated to financing clean energy projects across its global business operations. It was the first US technology company to do so and the largest green bond to be issued by a U.S. corporation to date. It could be only a matter of time before the behemoth’s competitors follow in its footsteps.

The Business Case

So what’s in it for everyone involved? For Vasakronan, there’s a clue in the fact that 50% of the investors were new to the company. Green bonds garner interest from funds with green quotas to fill, such as $22 trillion of investors who are members of the Global Investor Coalition on Climate Change. But it’s also increasingly from those who simply have a long term outlook for their investment horizons. For the corporates themselves, the business case is threefold. Firstly, it taps into new sources of finance for the business. Secondly, it can result in positive publicity and engagement with a wider range of audiences. Finally, it’s often shown to be a cheaper way of raising capital than financing internally. The backdrop to all this is a growing number of companies launching longer term sustainability strategies. For some, the reputational benefit is the primary motivation, but for others the cost-savings (from things like energy efficiency) as well as new innovations and business models, are just as significant.

Green bonds play a role here by directly engaging outside investors with a company’s long-term sustainability goals. Many companies now have targets to 2020, a few even to 2050. For teams charged with delivering on these goals, finance secured for the longer term can help. The maturity periods of green bonds, generally 5-7 years, commit the issuer to longer time horizons than internal pay-back periods would usually allow. Also, during times of economic volatility, “rationalisation” by corporates can otherwise see visionary investments scrapped in the interest of short term pressures. Finally, the arrival of corporate issuers on the scene means there are bonds with lower credit ratings, as compared to AAA rated EIB and the World Bank, but with potentially higher rates of return for investors.

What’s the downside?

Like any product in its nascent stages, there have been some growing pains. Deciding on definitions of what a green bond is, or should be, can be difficult. Leaving it too open-ended could de-value the positive environmental impact claims, while too strict a set of criteria risks dissuading issuers from releasing them in the first place. To address this there has been increased focus on the integrity of the market. This has meant a move towards standardising the provision of assurance, verification and reporting. The Green Bond Principles (GBP), as championed by the Climate Bonds Initiative (CBI), serve as voluntary guidelines on a recommended process for the development and issuance of green bonds. Conscious of the need to strike the right balance between confidence and flexibility, the Principles avoid being too prescriptive.

Apple hit the headlines in February 2016 with a $1.5bn green bond dedicated to financing clean energy projects across its global business operations.

To reassure environmentally savvy investors, and prevent claims of “greenwash”, some are calling for issuers to demonstrate that green bonds make it easier to fund projects that would not have occurred otherwise. The question of additionality is an interesting one and it remains to be seen how corporate issuers will address it. All this might mean that the whole process of issuance becomes quite a burden. But it can be argued that this is just good governance and, from an investor perspective, the financial and administrative cost falls with the issuer. On the basis of Apple’s adoption of a best practice pre and post review model, corporate issuers don’t seem to be phased just yet.

From niche to mainstream

The rapid increase in volume and number of by corporates could be a sign of bigger things to come. If the political will from Paris is followed through, it could result in a dramatically different investment landscape in the decades ahead. If others follow Apple’s lead, there are likely to be many new opportunities for long-term investors to get stuck in. Taken together, we might look back on 2016 as the moment when green bonds moved from niche to mainstream.

George Blacksell Senior Researcher Corporate Citizenship

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The European infrastructure challenge:

bridging the financing gap High debt and tight budgets are continuing to constrain public investment in muchneeded European infrastructure. Building on a survey of key experts, Michael Wilkins, Managing Director of Infrastructure Finance at Standard & Poor’s, suggests that increased public-private collaboration could hold the key to meeting investment needs. Considering Europe’s demand for more and improved infrastructure, increasing market liquidity and record-low interest rates, conditions would appear favourable for infrastructure development. Yet this potential is not being translated into greater investment.

Meanwhile, further mechanisms – such as the privitization of brownfield assets or the ring-fencing tax revenues – stand to help bridge the infrastructure investment gap in a more effective manner than we are seeing in Europe today.

Reduced infrastructure development

High government debt and tight budgets have limited public investment in infrastructure post-crisis (see chart). In fact, this has declined rapidly since 2008,

from around 3.7% of GDP to under 2.9%. Yet, as our survey found, private-sector financing has not stepped up to bridge the gap – despite increasing appetite for highyield projects and ample market liquidity. One reason is that bank lending is still stifled. Currently required by Basel regulation to hold additional capital in the current environment of high private-sector credit, many commercial banks in the EU have not revived lending for infrastructure to pre-crisis levels.

Investment in The EU As A Share of GDP (Bill. €)



In an effort to understand why, S&P questioned a range of key industry experts and policymakers, who highlighted austerity and affordability as the main obstacles to getting projects off the ground.




22.0 3.5




The survey also highlighted the need for greater collaboration between the private and public sectors – with investors (potential and existing) suggesting that governments should seek expert technical advice, and stay mindful of profitability and risk. Though Europe is familiar with Public-Private-Partnerships (PPPs), driving best practice remains a priority.



18.0 2.9

17.0 16.0





Total Investment (left scale)





Private Investment (left scale)





Public Investment (Right scale)

Source: Eurostat OECD, Standard & Poor's Calculations © Standard & Poor's 2015

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EUROPE FINANCE Prioritising the right projects

With lending reduced, it is even more vital that the right projects are selected. Governments must carefully consider which projects will have wide-ranging benefits and help spur economic growth. As an interviewee explained, “the key is to get the well-structured projects out the door, instead of over-investing in projects with poor social or economic return”. A notable example is Spain, where in recent years many provincial cities have invested in the expensive construction or upgrade of barely used airports: Castellón airport, north of Valencia, opened in 2011, but only saw its first flight in March 2015. Similarly, having cost around €474 million to build in 2008, Ciudad Real’s airport, south of Madrid, will be sold off at a loss following a failed auction process in 2015. Interviewees noted that the level of longterm planning varied significantly from country to country. In southern and eastern European countries, for instance, higher political instability can have a negative impact on infrastructure planning and selection. In Spain, again, a fragmented political landscape – a result of a hung parliament following the inconclusive general election result in December – is contributing to a lack of sustained, cohesive planning for the long-term.

Collaboration is crucial

Clearly, choosing the right projects, and seeing them into fruition is key. In this respect, PPPs can ensure vital infrastructure is realised and is, ultimately, profitable. By holding projects to private-sector demands for secure and high returns, properly accounted risks, costs and timeframes, the chance of default decreases – it is less likely that a project will fall over or remain unfinished, with parties involved with an invested interest in its success. S&P believes that a more developed and flexible PPP framework is necessary to drive Europe-wide best practice. A revitalised PPP market would see the public sector negotiating with private organisations more often. In this respect, local authorities would benefit from technical and financing expertise from the private sector, critically accounting for all construction and maintenance costs compared with a project’s long-term value. In turn, privatesector investors could gain considerably from long-term government planning and

project prioritisation, along with better understanding of local regulation. One possible PPP model to follow is that of Quebec, Canada, where the government identifies potential infrastructure projects – maintaining its officiating role – while the project planning, financing, development and operation is the responsibility of the private sector, through a dedicated infrastructure investment subsidiary of long-term institutional investors (Caisse de Dépôt et Placement du Québec).

Beyond PPPs

Meanwhile, our interviewees were keen to highlight that further mechanisms, beyond PPPs, can also help to address the deficit. One such instrument is ‘capital recycling’. Through concessions, licence auctioning, and asset privatisation, capital recycling is the sale of existing ‘brownfield’ infrastructure assets to provide funding for new ‘greenfield’ projects. For instance, Australia’s regional government in New South Wales passed legislation in May 2015 to sell its leased electricity business, in order to release capital for new infrastructure. Another potential route to unlocking funding lies in raising local revenues exclusively to support valuable infrastructure. A case in point is London’s Crossrail

development, with 60% of the new line’s funding coming from citizens. While a large part of this funding will come from ticket fares, an extra business tax of 2% levied on local companies will also provide financial support to the network over the coming decades. Undoubtedly, the development of the European infrastructure sector is stifled by widespread austerity. But as our survey revealed, many view increasing cooperation among Europe’s public and private sectors as a solution. Through PPPs and other innovative funding techniques, countries will be able to unlock their financing surplus and develop vital infrastructure projects to the benefit of their economies and wider societies.

Michael Wilkins, Managing Director of Infrastructure Finance at Standard & Poor’s Issue 3


Africa 40

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A LEADING INVESTMENT DESTINATION After a year which generated strong interest from investors and continued to spur foreign direct investment into the continent, Africa is rapidly rising and is one of the world’s fastest growing regions in the world. People are being lifted out of poverty, incomes are increasing, the middle class is growing, and young entrepreneurs are harnessing technology to change the way people live and work. In the year 2015, Africa witnessed a 136 percent increase in capital investment over the previous year, and as a result created 188,400 new jobs. The World Bank has projected the GDP in the region to pick up to an average of 4.4 percent in 2016 and further strengthen to 4.8 percent in 2017. A major contributor to Africa’s overall economy is Kenya, a country constantly making headlines due to its strong economic growth and progress. According to recent reports by the World Bank and the Oxford Business Group, Kenya’s economic growth is the highest in sub-Saharan Africa and is expected to remain robust at around 6.2 percent until 2030, well above many other African economies.

Panoramic view on Nairobi, Kenya

Stable macroeconomic conditions and a single-digit inflation rate has facilitated growth and expansion in the areas of

construction, manufacturing, finance and insurance, information, communications and technology, and wholesale and retail trade. The short-to-medium term positive growth projections are based on assumptions of increased rainfall for enhanced agricultural production, a stable macroeconomic environment, continued low international oil prices, stability of the Kenyan Shilling, improvement in the security situation for a positive influence on the tourism sector; and reforms in the areas of governance and justice. Such a positive upward trajectory has not gone unnoticed by international investors who are eager to cast their nets in the ever-promising economy of Kenya. Such strong economic fundamentals have led Kenya to become one of the world’s leading investment destination, and one popular with British investors and firm casting their gaze towards lucrative opportunities in Africa. The integration of East Africa is progressing well with the introduction of the new East Africa visa; tourists can now travel to three countries using one visa – Uganda, Rwanda, and Kenya. The region’s GDP has even risen to US$ 75 billion from US$ 20 billion in 1999. The region also boasts a population of more than 130 million. Issue 3



In June 2015, Barclays Africa, part of the UKbased bank, announced it had bought a 63.3 percent stake in First Assurance, Kenya’s 10th-largest general insurer, by paying shareholders KSh2.2bn ($24.2m) and injecting a further KSh700m ($7.7m) into capital.

UK and Kenya relations

UK and Kenya share a long history with the latter being a former colonial power. Kenya still uses the British system of education. Kenyan children are taught to speak English in their schools as their second language – as English was inherited from Kenya’s British colonial past, and is the language of choice for business, academics, and social set-ups in Kenya. After the British acquired Kenya in 1895, they developed infrastructure in East Africa with the Ugandan railway opening up to much of the Kenyan interior to European settlement, and in 1899 British pioneers established Nairobi as a settler outpost. 42

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2.6% of the population of Kenya – with more than 35,000 Kenyan citizens of British origin and 32,000 British expatriates.

The relationship has been further strengthened over the years as the two nations have become strategic allies and major trading partners. There has been a rising wave of British investment in Kenya as a number of leading UK companies have opened offices in Nairobi and are set to invest billions of Pounds in Kenya’s financial services, energy and infrastructure sectors. There are already over 60 British companies with operations in Kenya and more and more British investors are looking to explore business opportunities in the country. In June 2015, Barclays Africa, part of the UK-based bank, announced it had bought a 63.3 percent stake in First Assurance,


This year, Kenya is also proud to welcome British Prime Minister, David Cameron to further strengthen bilateral ties between the countries and forge stronger security, economic and diplomatic pacts. Along the sidelines of David Cameron’s visit to Kenya, Deputy President William Ruto met with British High Commissioner Nic Hailey to discuss mutual areas of benefit. The two leaders also discussed how the UK could play a leading role in the modernization of the port of Mombasa, and continue to increase investments into the energy sector, which will create job opportunities for Kenyans.

Ease of doing business in Kenya

Firms from the UK are investing into Kenya due to key factors such as tax treaties and investment promotion and protection agreements. In addition, investors are guaranteed that their investment is protected due to the Foreign Investment Protection Act that protects against the expropriation of private property by the government.

Kenya’s 10th-largest general insurer, by paying shareholders KSh2.2bn ($24.2m) and injecting a further KSh700m ($7.7m) into capital. In this way, UK businesses are recognising Kenya as a country that has provided some of the highest returns. Other British firms with a presence in Kenya, include Unilever, Prudential, Standard Chartered and Diageo and associates. On the infrastructure side of things, the large-scale project, Lamu Port Southern Sudan Ethiopia Transport (LAPSSET) corridor has attracted several investors from the UK, who are keen to support intercontinental and international trade.

An established private sector, liberalized Kenyan economy, a well-educated and skilled workforce and a sound government framework, make Kenya an appealing destination to many international investors. In addition, the Government of Kenya has planned to set up a ‘one stop shop’ for investors. As the name suggests this platform will serve as a guide to investing in Kenya. Supporting the one stop shop, the e-regulations portal launched last year also provides a step by step guide for investors as they receive all the information they require and full transparency on investment related procedures in Kenya. In addition, Kenya’s investment promotion agency – KenInvest – promotes and facilitates local and international investment into Kenya. The government agency provides investment information, project facilitation and after care services; helping investors to establish and expand operations in Kenya.

Charged with coordinating domestic and international players engaged in private investment, KenInvest continues to build a comprehensive and up-to-date database of investment opportunities in Kenya; both national and from across the counties. Kenya’s fundamentals are relatively strong, particularly considering the context of a continent that has moved through several decades of economic upheaval. Kenya’s investment climate benefits from political stability and GDP growth that has remained steady for the past three years. Despite the economic worries in neighbouring countries, the IMF forecasts another year of growth for the Kenyan economy by 6.8 percent in 2016. In addition, for the past three years it has managed to keep its inflation rate within its 2.5 – 7.5 percent target range, despite a period of currency devaluation. As a result, FDI into Kenya is continuing to double year-on-year; up 98 percent in 2013 and 92.4 percent in 2014. Given this momentum, and the unprecedented global focus on Kenya with major events such as President Obama’s Global Entrepreneurship Summit and our annual Kenya International Investment Conference matched with ongoing investor delegations from multiple global markets, we expect FDI growth to remain strong in the next 2-3 years. The First World Economic Forum held in Africa was held in Nairobi in December 2015. Another affirmation on the continued interest in economic investment and development in Kenya.

Anne Muchoki, Chairperson Kenya Investment Authority Issue 3




For banks looking to capitalise on the next major strategic growth opportunity, emerging markets have proven to be an excellent area to invest in; most forecasts suggest they will continue to outstrip G8 economies predictions over the course of the next few years. One of the sectors that has been credited with bolstering emerging market growth is digital financial services. There already exists a host of well-known examples of how new approaches to finance have allowed banks and other financial service providers to serve customers in new, innovative and commercially attractive ways. The most notable example is mobile money, which has taken hold in many emerging markets: in some countries, over half of the adult population use such services.

While some of these pioneering products have been highly valuable to end users and profitable for the institutions providing them, they still only serve a relatively small portion of the market. In fact, the range of products and services available has often been limited, with many focussed on a handful of use cases such as consumer-toconsumer payments and airtime recharge. This neglects a large and arguably more profitable section of the market: SMEs. Merchants, especially small businesses, are a key segment in all economies, but have been underserved by developments in digital financial services to date. According to the World Bank, formal SMEs contribute up to 45 per cent of total employment and up to 33 per cent of national income (GDP) in emerging countries with numbers significantly higher when informal SMEs are taken in account.   With the successful establishment of consumer-focussed services, the

market for financial services for SMEs is prime for explosion, presenting sizeable opportunities to banks. When considering, for example, the number of merchant payments an individual makes in one day compared with consumer-to-consumer transactions, it becomes self-evident what the enormous potential of the market is. At a macro level, the banking revenue from SMEs in emerging markets in 2010 alone totalled $150bn, which McKinsey expected to increase by 2015 to over $350bn.   Products like digital payment acceptance and supplier payments (such as for the fast moving consumer goods sector) are two areas that are projected to grow exponentially over the next decade.   As digital services grow this will lay the foundation for more advanced products and services to small businesses. These will include business orientated digital lending, savings and insurance products. Issue 3


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By enabling banks to offer real-time validation for loan applications, for example, they will transform the way small businesses operate in these markets.

The banks that will enjoy the most success in serving the market will be those which move quickly and strategically.

The first step for any such institution looking to capture this market is to review the underlying infrastructure that will support such services. Much of the core banking infrastructure in developing countries is based on decades old principles which struggle to rise to the challenge of delivering 21st century services to the bank’s customers. Without addressing this crucial strategic issue, few banks will be in a position to capitalise on the opportunity presented by small businesses in a digital world   To solve this problem, banks in emerging countries will likely need to collaborate with financial technology companies in order to develop suitable financial platforms to serve their customers. It is essential that their technology not only complies with existing KYC (know your customer) and AML (antimoney laundering) banking regulations – but makes it easy to apply them.   It is also critical that these are fully open products that can easily be connected to and integrated with systems so that banks can take full advantage of existing infrastructure which is used in the market at present.    It is clear that there exists an enormous opportunity for banks to tap into the potential offered by small businesses and merchants. The banks that will enjoy the most success in serving the market will be those which move quickly and strategically.

Soumaya Hamzaoui Chief Product Officer RedCloud Technologies

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Banking and Finance in Africa -

the players of the emergence WHY AFRICA WILL TAKE OFF Once considered a lost continent, weighed down by a latent Afro-pessimism, Africa has had a higher growth rate than the rest of the world for over a decade. Africa fascinates. It attracts Chinese, Arab and European people. It is a continent characterized by fast growth. And where governments once meddled, most of its member countries now promote free market mechanisms and the disengagement of the state. As a result, the continent is fast becoming the darling of the world’s multilateral financial institutions. The starting gun has gone off – Africa is on the move. Africa's population, about 1 billion people today, will be closer to 1.5 billion in 2030 and 2 billion by 2050. Half will be under 25 years of age. By 2050, the population of Africa will have exceeded that of China and India, and be three times larger than that of Europe. But much remains to be done. Nearly one in two Africans still live in extreme poverty and income inequality on the continent remains the highest in the world. 21 of the 25 poorest countries globally are on the African continent. Moreover, Africa remains a largely rural economy with a large informal sector and a growth mainly driven by natural resources. Despite these problems hope springs eternal. The debate of the 1970’s between Afropessimists and Afro-optimists has lapsed. Indeed, the heart of the reactor of African economies - its banking system - is now functioning and is more sustainable than the western model. New generations of 48

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African bankers are increasingly competent, visionary and enthusiastic. The system is working – so much so that in 2014 African banks delivered yields of 24%, six times the average return of European banks. This hasn’t happened by accident. African finance and banks have experienced significant changes and upgrades in the last twenty years. These changes have sharpened competition and encouraged bankers to develop new regional strategies based on emergent industrial logic.

Africa and Islamic finance.

Thirty years ago, Islamic finance was almost unknown in much of Africa. However, in several African countries such as Djibouti, Niger, Nigeria and Sudan, Islamic finance has been a growing force since the mid 1980’s. The evolution of the Sudanese banking system, for instance, saw the Islamic bank model implemented in 1984. Today, of 26 banks in the country, 7 are purely Islamic. But these were the exceptions. Now, Islamic finance is fascinating more and more people in Africa and the picture is changing rapidly. Today, it operates in over 60 countries through more than 413 financial institutions and exhibits an annual growth rate close to 20%. In North Africa, political openness to religious parties in Morocco and Tunisia amplify this interest. Islamic finance is defined by the Sharia, Islamic canonical law governing the religious, political, social and individual spheres. Sharia composed the rules governing contracts in a manner consistent with

Dhafer SAIDANE the requirements of Islamic law, inspired by the Koran and the traditions of the Prophet Muhammad. His precepts prohibit the use of interest rates in business – a fundamental difference to the western model – and also prohibits transactions disconnected from the real economy or undertaken for purely speculative purposes. Every financial transaction should be backed by a tangible asset and Sharia prohibits investing in unethical or activities considered haram, or illegal. The result is that Islamic finance exists primarily to serve people in a tangible real economy through contracts whose guiding rule is the sharing of profits and losses. Since its inception, Islamic finance has experienced exceptional growth. The International Monetary Fund (IMF), the World Bank and other international financial organizations believe that the assets of Islamic banks have risen to $1,800 billion between 2003 and 2013, with an average increase of 16% per year. They now exceed 2 trillion. More than 40 million people worldwide are currently clients of an Islamic bank. Projections show that the sector could double in volume to almost $4,000 billion in 2020. So - what should the future strategies of the major African banks be? What new challenges will the African banking regulator face? Will foreign banks decline or expand in Africa? And what are the major challenges facing African banks in general? These are some of the questions to be analysed and discussed in the future – a future that is looking bright.


Now, Islamic finance is fascinating more and more people in Africa and the picture is changing rapidly.

Dhafer SAIDANE Professor - SKEMA Business School Adviser to the CEOs Club of African bankers

Dhafer SAIDANE is the author of "Banking and Finance in Africa: the actors of émergence” Issue 3



MONETISING DIGITAL ECOSYSTEMS TO DRIVE FUTURE PROFITABILITY It’s now hard to imagine life before we had computing power at our fingertips, instant access to information and truly global communications, but the changes brought about by the digital revolution are far from over. In fact, the digital world is about to expand wider and further and, in doing so, fundamentally reshape the way we live, work and do business. As whole industries are challenged and transformed, a significant range of new technologies are being harnessed to deliver change, with the most essential technological element of all being connectivity itself. Without ubiquitous and reliable connectivity, the full potential of these new technologies will not be realised or the advantages from combining them in novel ways gained. This places communications service providers (CSPs) in a highly strategic position at the centre of the digital revolution, provided they are agile enough to leverage their position and grasp the opportunities presented. 50

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The scale of the opportunities is huge. Connectivity not only opens up new market and technological possibilities, but also presents entirely new possibilities as it transforms the way whole industries buy, sell and work. Take the manufacturing industry, for example, it is being transformed by 3D scanners & printers, increased automation and robotics. The industrial revolution saw increased standardisation being utilised to achieve economies of scale, delivering lower prices and higher profits. In contrast, the Digital Revolution uses and increases the advantages of industry, such as scale production and lower costs, but combines these with the advantages of the artisan – delivering products more tailored to individuals’ needs. The industrial age required scale: with big factories, big workforces, a big network of suppliers and sophisticated logistics. The next evolution of manufacturing will be empowered by supply chain innovation, more fluid

and globally-sourced workforces, and localisation of design assembly and fabrication – which could even become domestic when 3D printing has matured. Retailing is likewise poised for yet more seismic change. E-commerce has been one of the big success stories of the last fifteen years - delivering completely new retail goliaths such as eBay and Amazon – which makes it easy to forget that the vast majority of retail is still conducted offline. The march of e-commerce will continue, but additional change will be driven by a shift from multichannel to omnichannel retailing, as well as the use of much wider datasets to transform buying experiences. Retailers will gain a wider understanding of their customers by moving from using point-of-sale data to using a combination of data gleaned from non-buying as well as buying behaviour. This wider dataset will be used to redesign store and online experiences; innovate, improve and


personalise products; and even transform pricing approaches and offers. The ultimate goal, of course, is to understand customers better in order to maximise wallet share and physical or digital footfall. The media industry is yet another vertical grappling with the new realities of the digital age. On the positive side, digital distribution is a fraction of the cost of older technologies and delivers a global, connected market. The challenge here is re-designing business models as artists seek more control, and more revenue, from their creations, as well as more protection from theft. Taylor Swift is not just a talented performer but also a shrewd businesswoman who understands the redefined roles and shifting power in the digital ecosystem. She removed her music from the Spotify catalogue in late 2014, and tackled Apple for not paying musicians during a three-month free trial of its new streaming service. Speaking to Vanity Fair she provided

new insight into Apple’s behaviour which revealed its adaptability and rapid realignment to shifting business realities. “Apple treated me like I was a voice of a creative community that they actually cared about,” she said. “And I found it really ironic that the multi-billion-dollar company reacted to criticism with humility, and the start-up with no cash flow reacted to criticism like a corporate machine.”

The ultimate goal, of course, is to understand customers better in order to maximise wallet share and physical or digital footfall.

What Taylor Swift grasped was that success as a digital service provider is determined not just by providing an easy-to-use, easyto-understand and compelling service to customers; but also by providing the product that meets customer needs. This means attracting the right ecosystem partners who can supply products that customers want. Like Taylor Swift, the best partners understand both their value to this proposition and their USPs. Thus they will only work with companies that treat them fairly, because it’s now easier than ever for them to ‘jump ship’ and partner with others. Issue 3




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As the industrial advantages created by the requirement for scale combined with the cost of market entry dwindle, key advantages of successful companies in the Digital Age are rapidly becoming their ability to collaborate and source; their knowledge of and relationship with their customers; and compliant, trusted and easy-to-use transactional capabilities. The secret sauce of digital success turns out to be the ability to monetise emerging opportunities, using the right business models and pricing approaches.

CSPs are well placed for this role because of their investments and experience in charging, their trusted relationship with customers, and their ability to control, define and support a high quality of customer experience. They are also used to dealing with regulatory compliance issues that will need to be addressed, including key trust enablers such as data protection.

As we have seen, there are two sides to the digital opportunity and successful companies must be adept at both. Firstly, they will need to design, manage and monetise the customer experience; but they will also need to design, manage and monetise the partner experience. Understanding customers is one element of success; finding the right ideas, goods or services at the right price for customers is another. However, success cannot be achieved at the expense of suppliers, as attracting the best suppliers will require them to feel they are treated well, and are paid sufficiently to fairly reward their efforts.

Success in the digital world will depend on having a vision, but it will also require the right enabling infrastructure to deliver against these new relationships, business models and opportunities. Although CSPs will need to transform their infrastructure to support new opportunities, they shouldn’t fear this process. They can move rapidly towards digital commerce enablement, and in a far less risky manner, by judiciously leveraging legacy systems and supplementing these with any new capabilities required. Bridging between the old and the new can be achieved by using pragmatic strategies such as orchestration, which delivers rapid ROI without the risk and disruption associated with traditional rip-and-replace approaches to transformation.

Today without doubt, CSPs need to transition to becoming providers of digital services (DSPs) by revamping its offerings both in the retail and enterprise segments. The transition and changing dynamics within the industry is so rampant, we are not far from when we will see a DSP replacing a bank. This stands as a golden opportunity for CSPs to become enablers of digital commerce (DCEs).

Just as the move from steam power to electricity transformed the factory, so the move from the industrial to digital world will transform the ecosystem and how it is supported. Software change will be required; but a pragmatic approach can deliver the key advantages of speed and agility while minimising the risks and costs associated with previous attempts to realign and automate supporting infrastructure.

Max Speur COO of SunTec Issue 3






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For customers, the relationship with banks has come a long way since the days of needing to go into the branch to manage accounts. From phone banking and Internet services and now mobile banking apps, the number of channels that are open to us has increased dramatically. Banks are responding to this by investing heavily in new channels – for example, Bank of America announced that it has tripled its budget for digital and mobile app services this year. However, this investment in multi-channel service has an unintended consequence.

More channels, more problems

Customers using these new channels to interact with their bank have seen their initial experience go from surprise and delight to disillusionment at poorer response times when they have to wait for confirmation on transactions or requests for information. The reason for this? The back-end infrastructure within banks is not designed for this multi-channel environment. The database platforms that were able to cope with traditional channel services are not able to scale enough to cope with servicing more channels. As the new mobile apps and Internet banking services scale up, the volume of traffic has an impact on the overall service quality that all customers experience. As the demands of next generation customer service through mobile apps and online apps demand faster results compared to in-person or phone banking services alone, investment has to be made in supporting the back-end infrastructure strategy to cope as well. To cope with this multi-channel future, IT teams within banks have to look at the silos of data that exist across different locations and departments within the organisation. Rather than running with

traditional relational databases, new database platforms should be considered instead. Non-relational databases – often referred to under the banner of “NoSQL” or Not Only SQL – can provide a way to support the scale requirements of multichannel banking, as well as helping the bank consolidate from multiple data storage platforms and locations. Making the move to new data architectures – what do banks need to consider? NoSQL refers to a family of databases that have been designed to meet the needs of companies that have to scale up massively around data. Originally developed by the likes of Facebook and Google, these database platforms are now open sourced and available for businesses to use. They can provide far greater scalability for banking applications than is possible using relational databases alone. Deploying applications on NoSQL does mean learning new approaches to structuring schema and implementing database design – for those with experience in the world of relational databases, there is a learning curve to consider. However, there are new tools and query language frameworks springing up to make applying existing knowledge and skills around database easier, such as CQL (Cassandra Query Language) for Apache Cassandra. Using these frameworks can help those with existing SQL management experience get familiar with these new platforms faster. Alongside this, there are the issues of security and management to consider. For banks, security of customer data has to be of paramount importance. For any new data storage platforms, there are issues to consider around control of internal and external access. Issue 3


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For example, internal access control can include authentication and log-in accounts as well as object permissions to control which members of staff can access specific sets of data. Alongside this, it is important to consider use of encryption for any data that is stored, including encryption of data between any nodes that make up the overall cluster, whether this is within the same location or spread across multiple sites. Looking ahead, many companies are also considering how they can make use of Cloud technologies to support their operations. For some banking application workloads, the idea of moving sensitive data to the Cloud is still difficult. However, not all data created across the bank will be sensitive. It is possible to distribute data across the appropriate tiers and locations so that it can be held locally to those that need it to reduce latency while also meeting data security requirements. More importantly, this can be managed so that data can be consolidated down from existing silos while still meeting requirements around data sovereignty and location. However, to work efficiently across multiple locations, database platforms should be able to work in a fully distributed manner and share data efficiently between approved locations. This ability to manage location and security will be important as banks look to manage their customer data and meet the needs of regulations around security.

Banks are currently covered by financial regulations around data security and availability such as sections of SarbanesOxley and the Gramm-Leach-Bliley Act, while there are also specific requirements for data protection around credit card information in the Payment Card Industry Data Security Standards too. Alongside these existing regulations, there is also the forthcoming European Union General Data Protection Regulation around customer data security to consider as well. With so much data being created - and so many specific regulations to consider around credit card data, payment information, prevention of fraud and money laundering - consolidating data into one platform can help compliance activities too. By collaborating across teams, the actions of enforcing data security so that it meets the needs of multiple financial regulations worldwide can be made easier and at the same time provide customers with the service quality that they expect.

To respond to this – and to cope with the increasing scale of data that is being created everyday – bank IT teams must consider where new options can be implemented within their operations over time.

By making use of new data platforms, banks can improve their overall quality of service to customers as well as keep pace with new internal IT requirements.

Migration and service – the need for scale

As banks consider their approach to IT and digital services, the primary focus at present is the user experience. Moving to multi-channel has helped engage customers where they are most comfortable and looking for good service. However, this growth in channels has had an impact on the back-end infrastructure that banks have had in place for years.

Matt Stump Senior director of product marketing DataStax

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Sylvain Thériault, President of Desjardins’ Private Wealth Management, discusses private wealth management in Canada with Global Banking & Finance Review. Sylvain, can you tell us a little about Desjardins’ Private Wealth Management? Very few people know that Desjardins’ Private Wealth Management (DPWM) has been around for a little over 2 decades. In 2014, when I first took over the firm, I knew from the start that I wanted people to get to know us and recognize the firm as a market leader. Differentiating DPWM from the competition is not an easy task. In the private banking industry, the challenges are numerous, and the competition is fierce. What are the biggest challenges facing private wealth management in Canada? Amongst other things, digital access is a primary concern. In recent surveys, twothirds of high net worth clients say they are likely to leave firms that do not allow them to transact digitally. At Desjardins Private Wealth Management, we believe that we need to adopt a transformative mindset that integrates digital throughout the overall client experience. Digital access may not be a goal by itself, although, it is a necessity for the firm’s survival. Private wealth management is an exposed industry since its established business model is confronted by digital technology; the phenomenon creates challenges in delivering progressive client experiences while it can also represent huge opportunities such as harnessing the power of collected data to generate intelligence that can drive strategic decisions. In an effort to develop

a digitally integrated client experience, we also believe that Desjardins’ Private Wealth Management stands a better chance at creating durable bonds with the new generation. Always having in mind a simplified client experience, another one of our challenges is making sense of the new regulation without impacting client service. Regulation is increasing, and it is not built to fit a pleasant and simplified experience. Facing that fact, we try to create solutions that will meet both the authorities’ and the client’s expectations. Desjardins’ Private Wealth Management is also concerned with making sense for the new generation. Private wealth management as grown in a comfortably established business model that was mainly adapted to Baby Boomers and their way of life. The future of the firm relies on a younger well-off, intelligent, independent and more educated generation. Their need for useful and relevant information and rejection of hype are marked characteristics. This is due mainly to education and access to information offered by the Internet. They are savvier and are looking at a financial institution as a validation of their own hypotheses rather than a hard-board advice. They tend to search for authenticity and active participation, two important elements to be considered for the development of a durable bond. Issue 3



The new generation of high net worth individuals:





Well informed

actively in their financial affairs


Authentic and personalized experience


Where their grandfather was looking for sound advice from an expert a few times a year, they are logged 24 hours a day, having pursued brilliant studies abroad, themselves expert in finance, marketing or management, and are rather seeking confirmation or validation from their private wealth manager. Their time is valuable, and they generally refuse a rigid frame and preprogrammed activities. In the pursuit of this new generation, DPWM has put together a dynamic team of experts that resembles them and reaches out. We put families at the center of our priorities and make it a point of honor to meet everyone’s needs. How do you approach private wealth management? We consider wealth management as a private entourage for our clients. Our Private Client Team is dedicated and accompanies the client through all the wealth management domains; our experts analyze the overall portrait – the personal and professional situations are often lacking coordination, which can result in a weak global strategy – to obtain tax optimization. We also overlook the business transfer, the intergenerational transfer, manage daily banking needs and help achieve philanthropic ambitions. Basically, we are present in every aspect of our client’s lives. Issue 3


(thanks to internet access)



Validation of their own assumptions


What are the current trends you see taking place ? The private wealth management market is shifting towards a new model. Firms offering traditional financial solutions as well as integrated banking models are best positioned to provide the full range of complementary products and services suitable for high net worth families. At Desjardins Private Wealth Management, integrated approach proposes all services guaranteeing complete guidance in regards to wealth management. Philanthropy is also an important aspect of the high net worth market. The vast majority of high net worth clients believe that driving social impact is important, especially the younger generation. While the desire to make a positive social impact cuts across all wealth segments, emphasis on it correlates with wealth level. If philanthropy has been present in our society for a long time, it is currently evolving. We can see a growth of interest in relation to the social balance and the positive impact it can have. Traditional vehicles are at hand; community foundations, private foundations, structures and fundraising for charities are all ways to help others. However, the interest for customized solutions is increasing.


The emergence of the endowment is undeniable. The objective is to redistribute in the community, part of the fortune of its donors, without the complications of a private foundation. One of the significant challenges faced by the philanthropic industry is the lack of standardized and reliable metrics that allow effective measurement, management, and communication of the investment. Desjardins Private Wealth Management and Desjardins Foundation have partnered to create a simplified solution that solves all of the above; we have come up with a custom fund that will certainly satisfy our high net worth client’s desire to give back to society as well as clarify the details regarding the donation. The global strategy also serves estate and tax planning purposes. What are the future opportunities for wealth management? Research shows that high net worth families tend to work with fewer firms, despite the breadth and variety of their holdings. Not only can we offer comprehensive financial solutions through a single access point, we monitor our client’s financial health and are able to foresee unfavorable risk in their global strategy.


Desjardins Private Wealth Management provides an exceptional and unique client experience tailored for the whole family, so that we may nourish a sustainable client relationship from one generation to the next.

Sylvain Theriault President of Desjardins’ Private Wealth Management Issue 3


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DATA CLASSIFICATION: THE MODERN BUSINESS IMPERATIVE At the heart of any organization is the data that powers it. From financial data to employee files to new ideas and inventions, your organization is filled with information that, if lost or stolen, could seriously impact your business.

The Data Security Imperative

The proliferation of data-sharing tools, such as email, social media, mobile device access and cloud storage media, are making it harder for IT and data security departments to keep sensitive information from moving outside the network perimeter. The reality is that the data security perimeter is forever changed as data is accessed and stored in multiple locations. With workers uploading data to a wide array of unsecured data sharing services, the people you have working inside your organization pose one of the biggest data security threats. The 2015 Trustwave Global Security Report found that it took an average of 86 days to detect a breach – and that 81 percent of breach victims did not discover the breach themselves. In short, your data is slipping through your perimeter like sand through a clenched fist. It is important to note that the insider threat is not just a malicious user or disgruntled employee but could also be trustworthy employees who are just trying to work more efficiently. When workers are unfamiliar with correct policy procedures, and there are no systems in place to train, inform and remind them, they engage in risky information handling. Insider breaches, therefore, are not just a technological issue, but a human and cultural problem. You can install technologies to prevent uploading data to a cloud service, but if your users don’t understand the value of the data they are using, they are likely to see the technology as an impediment to their workflow and actively seek methods to circumvent security.

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your goals with innovative solutions Wealth Management | Capital Markets Sales & Trading | Asset Management


In short, your data is slipping through your perimeter like sand through a clenched fist.

The trend to keep all data forever is also having a negative impact on data security. As storage costs dropped, the attention previously shown towards deleting old or unnecessary data has faded. However, unstructured data now makes up 80 percent of non-tangible assets, and data growth is exploding. IT security teams are now tasked with protecting everything forever, but there is simply too much to protect effectively – especially when some of it is not worth protecting at all.

The Security Culture Imperative

Without executive guidance, security is relegated to IT departments that are already struggling for proper data security funding. When executive sponsorship is communicated directly to the employees, it is less likely that the employees will resist the change. Given the importance data security plays in the health of an organization, it should be considered a crucial business best practice. The most successful companies will be those that place a high value on protecting their intellectual property, customer information and other sensitive data. Shifting to a culture of data security will only take place when all employees are continually engaging in corporate security processes. Once the users are on board in principle, it is important to follow up with tools that are easy to use and provide immediate feedback with corrective suggestions when there is a violation.

The Classification Imperative

Classification is the indispensable foundation to data security, as it allows users to identify data, adding structure to the increasing volumes of unstructured information. When data is classified, organizations can raise security awareness, prevent data loss, and comply with records management regulations.

Classification is effective because it adds “metadata” to the file. Metadata is information about the data itself, such as author, creation date, or the classification. When a user classifies an email, a document or a file, persistent metadata identifying the data’s value is embedded within the file. In this way, the value of the data is preserved no matter where the information is saved, sent, or shared. Classification forces workers to pay attention to the value of the data being used. As classifications are applied, they can also be added to the data as protective visual markings. When the classification is visible in the headers and footers of an email or document, consumers of the information cannot deny their awareness of the data’s value—even when printed— and their responsibility to protect it. As information is shared, the classification metadata embedded within the file can be used by data loss prevention (DLP) systems, gateways and other perimeter security systems to enforce safe distribution and sharing. For example, a DLP system may be configured with a policy that restricts documents classified as “secret” from being transferred to a portable storage device. Similarly, policies that stipulate the necessity to encrypt the most sensitive data can easily be enforced. Rights management tools can be invoked based on the classification, applying encryption to outgoing emails or to documents being stored into repositories like SharePoint. Classification can also aid where compliance legislation regulates the protection and retention of company records. By providing structure to otherwise unstructured information, classification empowers organizations to control the distribution of their confidential

information in accordance with regulations such as ITAR, HIPAA, PIPEDA, SOX and many others. Regulated records may also need to be retrieved quickly for auditing or legal discovery purposes. Classifications can be configured to include additional information indicating which department and records management category the data belongs to. This extra information not only enhances retrieval but can also be matched to retention policies governing how long to keep the data and when it can be safely destroyed.

Classify to Secure

When classification becomes a part of everyday workflow, security awareness and risk-mitigating behavior takes root within the corporate culture. As employees classify, they are reminded to handle data securely. And when data is classified, it contains metadata values that the entire security ecosystem can leverage to enforce appropriate information governance and prevent data breaches.

Stephane Charbonneau CTO TITUS

Stephane Charbonneau is one of the original founders of TITUS and serves as Chief Technology Officer. His background as an IT Security Architect helps ensure the company’s product suites meet customer requirements. Stephane spent many years as a technology consultant, working with large international organizations in the public and private sector.

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Cliff Moyce Global Head of Financial Services Practice DataArt


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ARCHITECTURES... Unlike their challenger bank siblings and fintech cousins, incumbent banks have one particular problem to solve if they are to remain viable and competitive. That problem is high cost to income ratios of (typically) around 60%. Compare that figure to fintech firms engaged in ‘unbundling the bank’ who even when fully operational are operating at ratios as low as 20%. A large part of the difference in costs is the cost of operating and supporting legacy system architectures. Other factors include the cost of branch networks, and the (over) staffing implications of functionally divided organisations. High IT infrastructures costs in large banks arise from significant duplication and hidden redundancy; poor integration; high complexity; poor systems documentation and knowledge; a lack of agility / flexibility / adaptability; old fashioned interfaces and reporting capabilities; difficulties integrating with newer models such as cloud computing and mobile devices; being difficult to monitor, control and recover; and, susceptible to security problems. Getting old and new applications, systems and data sources to work seamlessly can be difficult, verging on impossible. This lack of agility means that legacy systems in their existing configuration can be barriers to improved customer service, satisfaction and retention.

In regulated sectors they can also be a barrier to achieving statutory compliance. Pressure to replace these systems can be intensified by new competitors who are able to deploy more modern technologies from day one. One radical approach to solving the infrastructure issue is to design and implement a new, more modern architecture using a radical clean-slate or blueprint-driven approach. Amusing analogies have often been used to encourage audiences to take such an approach, including the analogy of legacy infrastructures resembling an unplanned house that has been extended many times. But how easy is it to design and implement a new IT architecture in a large mature organisation with an extensive IT systems estate? Rather than the unplanned house analogy, a better analogy might be a ship at sea involved in a battle. Imagine if you were the captain of such a ship and someone came onto the bridge to suggest that everyone stop taking action to evade the enemy and instead draw up a new design for the ship that would make evasion easier once implemented. You might be forced to be uncharacteristically impolite for a moment before getting back to the job at hand.

The temptation to start again is enormous, but big-bang approaches to legacy IT systems replacement can be naive, expensive and fraught with risk. At some point, many large organisations have attempted the enterprise-wide re-design approach to resolving their legacy systems problems. Yet so many initiatives have been abandoned when the scale of the challenge or the impossibility of delivering against a moving target become clear. Time has a nasty habit of refusing to stand still while you draw up your new blueprint. Re-designing an entire architecture is not a trivial undertaking, and building / buying and implementing replacement systems will take a long time. Long before a new architecture could ever be implemented the organisation will have launched new products and services; changed existing business processes; experienced changes to regulations; witnessed the birth of a disruptive technology; encountered new competitors; exited a particular business sector and entered others. All of these things conspire to make the redesign invalid even before it’s live. If you are lucky, you may realise the futility of the approach before too much money has been spent. Furthermore, the sort of major projects required to achieve the transformation are the sorts of projects that run notoriously high failure rates. Issue 3


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A 2005 KPGM report showed that in just a twelve month period 49% of organizations had suffered a recent project failure, with IBM later reporting in 2008 that only 40% of the projects met their schedule, budget and quality goals. And as recently as 2012, a McKinsey and Company report identified that 17% of large IT projects fail so critically as to threaten the very existence of the company. So if wholesale blueprinting and reengineering is impractical, what options are left to solve the problem? Luckily there are some practical and cost effective approaches that can mitigate many of the problems with legacy systems while obviating the immediate need to replace systems (though eventual systems replacement should be an objective). Two viable alternative approaches are service-oriented architecture (SOA) and web services. Used in combination, they offer an effective solution to legacy systems problem. SOA refers to an architectural pattern in which application components talk to each other via interfaces. Rather than replacing multiple legacy systems, it provides a messaging layer between components that allows them to co-operate at a level you would expect if everything had been designed at the same time and was running on much newer technologies.

These components not only include applications and databases, but can also be the different layers of applications. For example, multiple presentation layers talk to SOA and SOA talks to multiple business logic layers - and thus an individual prevention layer that previously could not talk easily (if at all) to the business logic layer of another application can now do so. Web services aims to deliver everything over web protocols so that every service can talk to every other service using various types of web communications (WSDL, XML, SOAP etc.). Rather than relying on proprietary APIs to allow architectural components to communicate, SOA achieved through web services provides a truly open interoperable environment for co-operation between components. The improvements that can be achieved in an existing legacy systems architecture using SOA though webs services can be immense, and there is no need for major high risk replacement projects and significant re-engineering. Instead organisations can focus on improving cost efficiency by removing duplication and redundancy though a process of continuous improvement, knowing that their major operations and support issues have been addressed by SOA and web services. Another benefit is that the operations of the organisation can start to be viewed as a collection of components that can be configured quickly to provide new services even though the components were not built with the new service in mind. This principle is known as the composable enterprise. But addressing the issue of legacy systems in a way that makes good sense is not just an IT issue; it is also a people

issue. It requires people to resist their natural inclination to get rid of old things and build new things in the mistaken assumption that new is always better than old. It requires people to resist the temptation to launch ‘big deal projects’, for all of the reasons that people launch big deal projects - from genuine belief that they are required (or the only way), to it being a way of self-promotion, and everything in-between. It requires people to take a genuinely objective view of the business case for change, while operating in a subjective environment. It requires people to prioritise customer service over the compulsion to tidy up internally. And, it requires the default method of change to be continuous improvement rather than step change projects - which can be counter intuitive in cultures where many employees have the words ‘project’ or ‘programme’ in their job titles. So, to summarise, of course legacy enterprise IT architectures can feel like barriers to efficiency, agility, and customer satisfaction and making even the smallest change can often feel like it takes too long and costs too much money. The overwhelming temptation to throw the legacy architecture away and start again is understandable, but succumbing to that temptation can be a mistake. Luckily we now have technical tools and approaches available to affect radical improvements without having to incur the expense, effort and risk of major replacement projects. But using these tools comes with a change of mindset and approach that may be counter-cultural in some organisations. It can mean a move away from step-change and ‘long-march’ projects, and a move towards continuous improvement. Education and engagement will be one of the keys to making it happen. Issue 3





For the last 15 years, MasterCard has been involved in the creation, management and development of the EMV standard. Global Banking & Finance Review editor, Wanda Rich spoke with Ajay Bhalla, president of global enterprise risk and security at MasterCard about the EMV rollout in the United States. What is the EMV Standard? Ajay Bhalla: This is a very important subject for the future of payment systems to prosper. EMV was created by the three networks: Europay, MasterCard, and Visa. The networks then donated the standard to the industry to ensure a consistent level of security across the globe and all brands. Today this standard is managed by EMVCo as a separate standards organization, continually enhancing on the foundation from the 1990s to ensure it remains applicable today for transactions done in the physical and the digital world. EMV specifications ensure that chip-enabled transactions are processed with EMV standards. When we say, “EMV card,” this means that this chip card will work with an EMV-enabled terminal to create secure payment transactions. As the line between the physical world and the digital world is blurring, increasing convergence is apparent in cards and transactions. Most merchants are looking


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at ways to accept cards at the point of sale and online, giving consumers a choice as to where to shop and how to pay. MasterCard’s EMV product M/ Chip is present in cards, phones and other payment form factors, delivering interoperable and safe payments in all channels. You’re seeing that in the introduction and use of tokens today. Basically, tokens take the underlying technology and approach of EMV and apply it to the online and digital worlds. At the heart of this – on a card, online or on a phone/device – is taking the “static data” and making it less valuable, if any value, should the card be lost or stolen. If a token was provided for use at a point of sale terminal, captured and used for an e-commerce transaction, this will be detected and the transaction declined by the bank.This technology is called MasterCard Digital Enablement Services or MDES, and is our core system for enhancing payments with tokens.

Together, MasterCard’s M/Chip product and MDES provide a safe and secure payments environment regardless of where or how the consumer shops.


I’d like to understand more about EMV and the reduction of fraud. If when consumers go to the store to make a purchase and I am asked to sign for it versus entering my PIN, is this transaction as secure as when my PIN is entered or is the security reduced? Ajay Bhalla: Our approach to security is multi-layered but we know that fraud still occurs from time to time. This is why we rolled out our Zero Liability protection globally so that each consumer around the world using a MasterCard product is protected from fraud. This is an industry first global protection and I am very proud of this work. In terms of EMV specifically - EMV protects against counterfeit fraud. It provides a very strong method of proving that the card being used is in fact the genuine card, by ensuring that every transaction is signed

cryptographically – and only the genuine card can do that. There’s no doubt that in EMV markets around the world, the drop in counterfeit fraud rates has been the single biggest benefit of EMV. In terms of PIN vs Signature, I will say that MasterCard supports both chip-andsignature and chip-and-PIN. Ultimately, it’s up to the issuer to decide which technology to implement. I recently had someone create a duplicate card and try to make purchases but my card issuer knew immediately and blocked the transactions and contacted me. Is this because the fake card didn’t issue the dynamic data? Ajay Bhalla: Our philosophy about layers of security is important to note here. Each and every payment transaction you make is

protected with multiple layers of security – whether we are securing the account, the cardholder or the transaction itself. In addition, there has been a consistent level of investment by the industry regarding common global standards like PCI-DSS and individually by organizations in their systems including issuers, acquirers, networks, and others to eradicate fraud from the system. Everyone in the payments industry is working together fight fraud. The example you site specifically is an excellent example. Cloning mag-stripe data is the source of most counterfeit fraud. It is extremely difficult to clone the chip on an EMV card. Your bank will be on the lookout for transactions that are not unique or have been seen before and will act accordingly. Issue 3







So this should really reduce a lot of the fraud at least that we have been experiencing here in the U.S. Ajay Bhalla: Absolutely. EMV has been used for 20 years, in over 150 countries, and we’ve seen significant reduction in counterfeit fraud in countries where EMV has been launched. We’re delighted that the U.S. has embraced innovations in payments technology and, by the end of 2017, it is predicted by the U.S. Payment Security Taskforce that more than 98 percent of cards will be chip enabled. When it comes to the roll out, what have you been witnessing? Are you noticing a difference within the regions of the U.S. as far as how smoothly the transition is taking place? Ajay Bhalla: EMV is an essential upgrade to the U.S. payments infrastructure but as importantly it will take time. You can’t just flip a switch and assume all necessary changes are made. The U.S. is moving as fast – or faster in some cases – than other markets. And, with the complexity of so many players – think International Organization for Standardization (ISOs), payment service providers, terminal manufactures, acquirers, merchants, etc. – there’s a lot of work that has been done.  So we’re very encouraged. 72

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Six months on from the October 1, 2015 liability shift, we are seeing great collaboration within the industry to help drive card fraud out of the U.S. In March of this year, we assessed where we are since October. More than two-thirds – 67 percent – of U.S.-issued MasterCard-branded consumer credit cards now feature chips. This represents a 51 percent increase in the number of consumer credit cards with chips in market since the October liability shift. Consumers can use their chip cards in more places, as 1.2 million U.S. merchant locations – an increase of 121 percent – have turned on their terminals and are accepting chip card payments. In addition to national retail chains, approximately one million local and regional merchant locations are accepting chip cards today. That’s 170+% increase since October! We have focused our efforts on assisting banks, merchants, and consumers during the transition. We are committed to educating our stakeholders on how the transactions work and assisting them with the production processes and the transition.   I would agree with that statement and as far as the delay goes, some retailers are still in the process of communicating the process to their cashiers. I myself have witnessed

the confusion that can occur between the cashier and a consumer when the cashier is not equipped to answer questions about the change, I think this will clear up as everyone becomes more familiar. What about the case where merchants have the systems in place but they aren’t yet using the chip feature? Ajay Bhalla: The in-store EMV implementation is a process. We need to continue to educate everyone in the payments process about the ease and success of chip-enabled cards, and show how others have embraced the improved technology in several countries around the world. There will still be some cases where merchants have enabled it but have not begun using it, or staff are not equipped to use it, but adoption and training with new technology takes time. Adapting to new technology really comes down to educating customers and merchants, and the U.S. has done a remarkable job so far. Delays and challenges is merely part of the learning curve which is normal for any new technology. Our 2015 EMV consumer research  shows that so far, 8 of 10 consumers find EMV  more secure, easier to use, and more reliable.


Again, we are already seeing great progress since October 2015, and the penetration and adaption of EMV will only get better. One example that comes to mind is how the UK has embraced new technology – I remember rarely being able to use contactless when it was first introduced in the U.K., where I am now based, but now we are used to contactless cards in almost everything we do here, including transport.  Well as you see less and less fraud occurring, that sentiment is only going to increase. Where do we go from here as far as electronic payments? What’s next do you think, on the landscape as far as electronic payments go? Ajay Bhalla: The main payment space is evolving at a very rapid pace. We have seen more innovation in payments in the past five years, than we have in decades. As the lines between physical and digital channels are converging, we are also seeing an increasing share of digital transactions globally. Though it is still a relatively small number, global digital transactions are growing at a very fast pace. As part of the increasingly digital world of the Internet of Things, connected devices, the cloud, we will inevitably witness more and more transactions between devices.

The world of payments is looking very interesting as new technologies emerge; from printers buying replacement ink, to smart refrigerators buying your groceries, to cars making their own transactions.

learning technology like MasterCard IQ series, are all vital steps which create multiple layers of protection to ensure that consumers can transact securely with MasterCard.

Our role in this is critical. It is predicted that 50 billion devices will be connected by 2020, and these devices need to be enabled by commerce. To do this, there must be payment functionality. We have now launched the technology which enables connected devices to make secure transactions. We are continually exploring innovative technology to make the merging of the physical and digital world as smooth and secure as possible, and enabling convenient payments everywhere. This has been done through the development of layers of security to secure transactions; chip card, biometrics (MasterCard Identity Check), and machine

Ajay Bhalla President Global Enterprise Risk and Security, MasterCard

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THE GAMING EDUCATION PARADIGM Financial inclusion on a new scale and its impact on the financial industry In the history of Wall Street, education has always been a practical necessity. Traders moving up the ranks would pass on their experience to newbies looking to make their fortune and over time, this process became more institutionalized through graduate programmes. In the 1920s new hires came in with little education but nowadays an excellent degree from a top university as part of a flawless CV is preferred.

The Need to Broaden the Audience Despite this innovation, the financial industry has struggled to appeal to a wider audience and is still primarily targeting those who already have an interest in trading and investing, moving acquisition costs, e.g. in the Forex, CFD and Spread

Betting industry, into areas north of $1,000 per client and contributing to a mere 7% global participation rate (including both direct and indirect, e.g. pension contributions) in the stock market and subsequently even to a widening income gap between the 1% and the 99%.

Composition of Income Reported on 2012 Tax Returns, by AGI 100


Percentage of Income

Educating the customer about financial products has only been necessary if required by regulation or if it would help the client buy a particular financial instrument. Over the last decade, however, the barriers to entry to the financial markets have come down considerably. Free or low-cost information and access to real-time quotes, fractional investing, robo advisors, social trading, Exchange Traded Funds (ETFs) and Contracts for Difference (CFDs), low minimum deposit sizes and lower bank and brokerage fees have evened the field between institutional and retail trading and investing. FinTech startups have moved the focus further towards mobile and accessibility.




0 <$25,000



$500,000$1 million

$1 million$5 million

$5 million- >$10 million $10 million

Adjusted Gross Income in 2012 (dollars)

Key: Capital Gains


Business Income



Interest and Dividends

Salaries and Wages

Source: IRS, Statistics of IncomeBulletin Individual Income Tax Returns, 2012, Table 1.4. Other income includes state tax refunds, alimony, unemployment compensation, gambling income, rent and royalty income, and other items

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Education Through Gamification

Education has been identified as one of the areas which has the potential to improve accessibility further. Currently, most financial companies offer education as a way to attract search traffic, as a kind of extended FAQ to reduce support effort or simply because they might feel it’s a hygiene factor which they need to cover but which will provide little ROI for them. In other words, it is not their core competence. The trend towards further sophistication in educational technology further shows that it can hardly become a financial company’s strength to educate in innovative ways. Platforms like Coursera offer university and other courses online in high quality, and does the same for the financial industry, bringing together top experts in an interactive, digital knowledge portal. Edutainment webcasts, mobile games, augmented and virtual reality are waiting around 76

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the corner, initiating the next cycle of innovation that requires intense focus on the respective domain. Games, in particular, have the potential to transcend target group barriers. More than a decade ago, the U.S. military started using computer games in its recruitment efforts, and the trend is only being accelerated by the usage of drones in the battlefield. Where traditional military recruitment falters, games captivate audiences emotionally, allow for the screening of top talent and prepare recruits for combat in realistic ways – often without the individual realizing it. The financial industry has mainly focused on the simplest way of simulating the real market experience, by providing potential clients with free paper trading or demo account access. The challenge of such an approach is that it is the equivalent of throwing a fresh military recruit into the middle of a war zone.

The education provided on the respective website equaling a 10 page quick-guide to happy survival which the recruit has to skim through before the first bullet hits him or her. Games are addictive because they are more than mere simulations of reality. They depict reality bit by bit, abstract, deduct, remix and speed up reality and amplify the gratification of progressing with performance transparency and rewards. An example of this is our mobile game “Little Traders” which conveys the joyful challenges of the financial markets by bringing the player into the 1920’s stock market where they build a Wall Street empire floor by floor by investing wisely for virtual clients in a realistic market environment, unlocking new skills along the way. Players who had no intention of becoming traders are willing to learn about trading in order to get better at the game. Thereby, the target group that the financial industry can subtly advertise to through the game has become wider.


Attracting a Younger Demographic

This trend is expected to continue further with the wider adaption of augmented and virtual reality which have further potential to immerse people into experiences that they were previously afraid of. It’s especially true for the younger generations. It is easy to imagine millennials playing a game like Little Traders to open an account with a mobile-first broker such as Robin Hood or others that have simple, mobile-optimized account opening processes. The willingness to try new apps at the tap of a button is also higher on mobiles among younger target groups.

Percentage of U.S Adults Invested in the Stock Market Do you, personally, or jointly with a spouse, have any money invested in the stock market right now- either in an individual sotck, a stock mutual fund, or in self-directed 401 (k) or IRA? % Yes 62



60 60 61


























52 ‘13



Selected trends closest to April for each year, including 2000, 2001 and 2003-2013 trends from Gallup's annual Economics Personal Finance Survey Gallup

It is not surprising that while, for example in the U.S. there has been lower involvement in the stock market since the financial crisis, there has been increasing momentum again among younger target groups.

Americas invested in Stock market - Selected Trend By age and income

Sebastian J. Kuhnert Apr 2-5, 2007

Apr 8-11, 2010

Apr 9-12, 2015




National adults




$75,000 and over








Less than $30,000




18 to 34 years




35 to 54 years




55 and older




As an industry, if we are looking at broadening our audiences, we need to look carefully at how to engage younger generations. Mobile games, augmented and virtual reality are undoubtedly the route forward – an engaging and fun way to educate people.

Founder & CEO Tradimo Interactive

Sebastian Kuhnert is founder and CEO of Tradimo Interactive, a dynamic FinTech organization, with a goal of making the financial markets accessible for everyone. The business consists of two divisions - an educational gaming company (which has just launched Little Traders) and an online course platform for financial markets, which has educated over 3 million learners with its video courses from leading experts on how to navigate the financial markets. Experts can submit courses which Tradimo reviews and shares in the revenue. Little Traders is free, available on the App Store.

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Challenged by FinTech rivals and established technology companies, retail banks are struggling to keep up with the quality and depth of digital experience that their customers demand. And if they can’t address this gap in expectations? There’s every chance they will die. Late last year, Beyond conducted new research to pinpoint the digital design weaknesses banks most urgently need to address, in order to improve the banking experience and fend off competition from digital rivals.   We found that banks have much to do to bring their digital products up to speed, as customers want improvements to even the most basic areas of the digital banking experience.In particular, banking 78

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customers highlighted the following as areas in need of urgent attention: 1. Security: 65% want additional levels of security, a concern that has grown in importance thanks to increased media coverage of security breaches. An entry-level expectation from the digital experience, security is the first basic area on which banks are failing to deliver. 2. Speed and ease: Customers also want an increase to the speed and ease of their online banking services. Unfortunately, this can be a doubleedged sword, as a service that is too quick and easy to use can create suspicion amongst customers, who believe their safety isn’t being taken seriously. While 56% of customers say they want faster ways to transact

online and 51% want easier ways to log into their accounts, this anxiety must be taken into account. 3. Personalisation: As technology develops and becomes more sophisticated, customers expect the same from their banking experience, seeking banking products that respond to their individual needs.

In particular, 53% wanted digital products to help them save money based on their data while 51% wanted personalised tools to help them make financial decisions.


The answer is to rethink traditional design practices: 4. Launch quickly and test – A testand-learn approach may appear to be impossible for large institutions, used to multiple layers of management and approval – but in fact, it can be an excellent way to innovate, particularly given the speed with which technology is evolving. Even for banks, the Minimum Viable Product (MVP) method of product development can offer a great way to get rapid feedback on new offerings, which can then be iterated – while products and features that get a poor customer response can be dropped with little ill effect. When this approach is used with independently-developed, experimental product sets, it can enable the organisation to optimise and learn faster, avoiding costly mistakes down the road.

Digital banking products that offer a ‘one size fits all’ solution are no longer enough for today’s banking customer. While the research did uncover key areas for improvement in the digital banking experience, the fast-moving nature of technological change means that fixing these elements alone can only be a temporary solution. Banks need to go further, designing transformational product sets now, in order to secure their futures. This kind of innovation means adopting an agile, creative approach – a challenge for institutions beset by regulation and built on historic managerial structures. So how can banks overcome this challenge, and adopt the agile approach of a startup?

5. Use partnerships to develop fresh ideas – External partners bring with them deep expertise, a broad experience, and the ability to challenge set ideas

and Google have access to large amounts of behavioural data, which offers them deep understanding of their client’s online activity. With this wealth of knowledge, they can create sophisticated digital experiences that anticipate a customer’s needs. To understand how to improve their digital products, banks must use behavioural insights to uncover points of friction in the customer journey. Only by doing this can traditional banks improve and personalise experiences for their customers. 7. Start with gradual changes – As technology evolves at pace, banks must come to understand that change – however small – is better than no change at all. Instead of waiting for one, radical transformation, banks can instead improve digital offerings more gradually.   For a traditionally cautious industry, trialling products and only then repatriating them is a great way to achieve necessary change to main product offerings.

For banks looking to develop forwardthinking products that anticipate the desires of their customers, such partnerships are a great way to source the necessary breadth of ideas. This works best when product and design teams work independently from each other, with product teams given the freedom to develop transformational product sets that can be brought to market quickly, then tested and rolled out further. 6. Use data to uncover points of friction – Larger and more established technology companies like Amazon

Nick Rappolt CEO Beyond

Nick Rappolt is CEO of Beyond, an experience design agency with offices in London, San Francisco, Mountain View and New York. Issue 3





You may have noticed that the financial services industry has experienced a wave of digital disruption. According to H2 Ventures, a leading FinTech-focused digital design and investment firm, global FinTech financing grew from less than $930 Million in 2008 to more than $1.04 Billion in October 2014 alone. Like most industries today, digital innovation now serves as a primary success factor. Allowing consumers to understand and easily manage finances without a traditional broker or bank presents an existential threat to the industry. By embracing new technologies, disruptors like LendingClub—a peer-to-peer lending company—and FutureAdvisor—a digital investment manager—are pushing traditional banks to find new ways to stay relevant to the ever-evolving consumer. 80

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The new financial consumer

Today’s consumer is digitally savvy and always on the go. They’ve come to expect simple user experiences coupled with information that is easy to understand and accessible wherever they are. Millennials, in particular, tend to bank differently than other consumers. According to the 2015 Nielsen Report Millennials in 2015: Financial Deep Dive, “Millennials are cautious bankers, wary of traditional financial and investment strategies.” They’ve taken a do-it-yourself approach to finance. And with the influx of mobile services like Apple Wallet, Android Pay and apps like Stash that allow consumers to invest as easily as ordering an Uber, rarely do they find a need to balance a checkbook, visit brick-and-mortar bank

locations or talk to a Financial Adviser. The always on and on-demand mentality is more present than ever before and is moving beyond banking to all aspects of financial services. Interestingly enough, while 42% of Millennials surveyed put their spare cash after covering essential living expenses into a savings account, only 11% put it into a retirement fund or invest in stock/ mutual funds. If this is any indication on how they perceive banks and advisors, traditional financial institutions have a lot of work to do. So, how can the incumbent financial institutions maintain market share as consumers expect the same digital experience from their bank as they do from Amazon or Uber?


Today’s consumer is digitally savvy and always on the go. They’ve come to expect simple user experiences coupled with information that is easy to understand and accessible wherever they are.

Consider the customer journey

The biggest challenges facing financial organizations don’t stem from insufficient technology. They result from the difficulty of integrating emerging technologies within established systems. This means shifting from siloed, department-centric organizations to agile, customer-centric organizations that leverage digital technologies to create better customer experiences. It’s no longer adequate to passively wait for consumers to make a purchase decision after they’ve become a client. Instead, banks and financial services organizations need to engage consumers at every stage of their purchase journey. This isn’t just because of the immediate opportunities to convert interest to sales, but also because the decisions that consumers make are informed by the quality of their experiences.

Consumers are constantly inundated with messages across a variety of channels and devices. Financial organizations need to craft compelling consumer experiences in which all interactions are personalized. To do this, financial companies should engage with consumers using the right channel(s) and at multiple touch points along the way. The most successful organizations have learned that digital marketing is not an add-on to their marketing. They understand the importance of integrating it into their overall planning, analytics and messaging strategy, enabling teams and individuals to foster near realtime customer engagement. This brings value to the consumer while also delivering bottom-line results to the organization. Focused on delivering an innovative customer experience, services like Wealthfront, FutureAdvisor, and Betterment, have established themselves as leaders in the emergent “robo-advisor” field. Their approach isn’t new. Using personal income, net worth and attitudes to assess a client’s risk tolerance, they recommend and build portfolios similar to a live broker but with better content, explanations and tutorials. What’s also different is that since twothirds to three-fourths of financial advisors don’t make it beyond five years, trust is much higher knowing that they’re not relying on the advice of someone in a transient commission-based role.

Bring digital to the forefront

Banks are great at risk management, financial governance, investing and asset management – the core competencies of a financial institution. For most financial services companies, digital isn’t a priority because it’s simply never been a part of a bank's DNA. In order to bring technology to the forefront, banks must make cultural and institutional changes to let technology drive enhanced customer experiences. To truly drive innovation in the customer lifecycle, financial institutions need to leverage the vast amount of consumer insights and data to effectively guide multi-channel marketing initiatives and personalization. Organizations must apply advanced analytics to the vast amount of structured and unstructured data that’s at their disposal to gain a holistic view of their consumers. This includes analyses of the consumer’s current relationships, recent behaviors and past experiences with the company. This requires thinking like an eCommerce company more than a bank while still maintaining a high degree of customer privacy and protection. All players in the “robo-advisor” space have taken advantage of this array of data. While many financial service providers look to demographics to tell them who their prospective client is to craft ad campaigns and plan media, it's rarely used to personalize and improve the experience. Issue 3



New players in the space go further to understand psychographics to create a truly holistic profile beyond explicit information. These new entrants can ultimately create more responsive and tailor-made experiences by utilizing information like customer login frequency, social graph data, and mobile vs. web use. Through this, they can simplify the investment process, provide feedback to a broad base of consumers in various life stages and mimic the customer experience of a seasoned and more expensive financial advisor.

Earn the trust of your consumers Over time, confidence in banks and financial advisors has eroded. According to Nielsen Report, Millennial consumers, especially, want a transparent and authentic relationship with their financial institutions. Because of this, many financial institutions are faced with reevaluating the way they offer products and services to a new generation of digitally native consumers. Smart financial institutions are building trust through increased transparency, re-aligning products and direct education. In order to build relationships, earn greater trust and reap the advantages of consumer loyalty, financial institutions will have to successfully leverage innovation, balance their needs and safeguard their wealth.

Companies can do so by giving consumers an easy way to understand how their money is working for them. Education and transparency will help them feel like they’re

in the driver’s seat. With the diminishing patience of digital consumers, any process or privacy concerns that are overly complicated will likely turn them off and lead them to choose a different service. Financial institutions that come out on top will shift the messaging model around simplicity and transparency, not assets under management or years in business. Owning consumers’ trust can be acquired by large institutions and newcomers alike. It can be achieved by putting customers first — in the ways departments are structured, employees are incentivized, and capital investments are made.

Invest in partnerships or look for acquisitions instead of building in-house

For many financial service institutions, the concerns of organizational leadership are typically far-removed from the consumer. Ask a CEO at a bank or financial institution what success means to them. They’ll likely be more concerned with managing risk, liquidity and return on investments for shareholders. Critical, yes; but it's rare to hear success that’s tied to excellence in digital marketing, innovation, analytics or understanding the customer journey. As technology continues to change the customer experience, financial organizations should look outside their organizations to help shift greater focus to a digital solution that meets the needs of the end user.

For those financial services institutions where consumers and digital are an afterthought, find a partner that understands how to marry financial services, especially the regulatory aspects, with an overarching digital strategy. A solid partner should be thinking about the customer relationship and full customer lifecycle rather than a single transaction.


Financial services organizations that ultimately succeed in navigating disruptive innovations show an ability to effectively leverage data and digital touchpoints to drive growth and reduce costs. Further, real-time content management and partnerships with agile companies will help bring products or services to market faster and create exceptional customer experiences. Finally, and arguably most importantly, the institutions that will rise above are the ones that put their consumers first.

Alex Lirtsman Founding Partner and Chief Strategist Ready Set Rocket

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Whether or not the US did choose to follow a policy of benign neglect towards the USD is, in our opinion, in some ways, irrelevant. What does matter is that between the start of 2002 and the summer of 2014 the targeted Fed Funds rate on average lagged behind the headline inflation rate by 64 basis points (bp). This stood in sharp contrast to the 294 bp average pick up afforded during the Rubin era of the strong USD that began in the late 1990s. At its most extreme (September 2011) the Fed Funds rate stood an astonishing 361 bp below the inflation rate, a level only previously seen back in 1975.


12 10

160 8 6


4 120 2 0


-2 80 -4

































60 01/05/1972

-6 01/01/1971

One of our core beliefs is that the US adopted a policy of "benign neglect" towards the US dollar (USD) somewhere in late 2001/early 2002. Indeed, the idea that the US might be prepared to follow such a policy had been publicly expressed as early as October 2004 by Japan's former vice-finance minister for international affairs, Eisuke Sakakibara. He told Dow Jones Newswires that a "surprisingly large" number of current and former government and central bank officials he had recently met in Washington and New York seemed to hold the view that "some sort of foreign exchange adjustment," could be used to address the US twin current account and budget deficits. He added that Washington might choose to tolerate a USD fall in a form of "benign neglect," even without explicitly saying that was what it was doing.

Key: Gap between US Fed Funds Target rate and US CPI % Change y/y (Source: Federal Reserve/Reuters) US Dollar Index (source Reuters)

The impact on the USD was straightforward with the trade-weighted index falling 38% between the start of 2002 (when the Fed Funds rate stood 60 pb above inflation) and the start of September 2011. The impact of this sustained USD decline on commodities such as oil and gold, and on a wide range of currencies was dramatic but easy enough to understand. Gold rallied by close to 500% against the USD over this period while Brent Crude

gained over 400% (with the largest gains coming whenever the US looked to ease monetary policy aggressively). Equally, the FX reserves of many emerging and developing nations soared as they either stepped into the market on a regular basis to fight against currency strength or enjoyed the benefits of surging revenues from oil sales. Between January 2002 and the summer of 2014, these reserves grew from around USD 800 billion (Bn) to just over USD 8 trillion (Trn) according to the International Money Fund's COFER data. Issue 3


AMERICAS TRADING The first sign that this era of easy USD funding was drawing to a close came on May 10, 2013, in a speech given by then Fed Chair Ben Bernanke. He stated that "in light of the current low-interest rate environment, we are watching particularly closely for instances of 'reaching for yield' and other forms of excessive risk-taking." He added that such activity "may affect asset prices and their relationships with fundamentals." As we noted at the time, by highlighting the link between ultra-loose monetary policy settings and asset bubbles he was also (albeit indirectly) calling time on the policy of "benign neglect" towards the USD. A sign of what was to come came in the summer of 2013 (even before the Federal Reserve had begun tapering its asset purchases), as the currencies and markets of a number of developing nations with significant current account deficits (the "fragile five") came under pressure in anticipation of the drying up of inflows from the USD. However, it was in the summer of 2014 that a real shift in the environment began to emerge. Ironically, the catalyst for the sharp appreciation in the USD from June 2014 onwards was not a change in US monetary policy (the Fed had been reigning back its asset purchases since the start of the year) but, rather, the European Central Bank's (ECB) decision to introduce a negative deposit rate for the euro (EUR). Within days of its implementation, a rally began that subsequently saw the USD index gain close to 25%. The most telling impact of the postsummer 2014 USD rally was not felt in the mainstream currency markets (other than a sharp rise in volatility) but, instead, in those commodities and emerging market currencies that had particularly benefitted from the USD funded bubble formed over the previous 12 years. Perhaps the most eye-catching turnaround came in oil prices with Brent crude losing over 75% since June 20, 2014. By November of 2014, the collapse in oil prices had forced Russia's central bank to allow the ruble (RUB) to free float rather than continue to see the massive drain on its FX reserves it was suffering (having fallen by USD 95 Bn since the start of 2014). Although Russia's FX reserves sustained a further USD 64 Bn decline over the next five months, the numbers began to stabilise from May of 2015 at around the USD 300 Bn figure. Tellingly, although the RUB continued to suffer (particularly from October/November

of last year as it became increasingly clear what both the Fed and the ECB were likely to do), local markets have performed relatively well since then. Most notably the Moscow Interbank Currency Exchange (MICEX) continues to trade at roughly the same levels as it has for the past 12 months. Similar to what the UK discovered back in 1992 when it left the Exchange Rate Mechanism, Russia has been able to encourage a degree of welcome stability in local markets by letting its currency take the strain.

While Russia might have decided that discretion was the better part of valour when dealing with the radical shift in the financial environment seen since the summer of 2014, others chose to continue defending their currencies. Most notably China (having seen a stock market bubble of its own formed during the first half of 2015 that was eerily reminiscent of that seen in late 2006/early 2007) began to see increasingly dramatic draws on its FX reserves. Last August, China saw a USD 93 Bn decline while December saw an astonishing USD 107.9 Bn drop.

In January 2016, the Shanghai Composite fell to more than 40% from its peak in June of last year. The reason why this matters is simple enough. Rather than being (relatively) unrelated market shocks both the downward pressure on oil prices and the turmoil in Chinese currency markets can be seen as a function of the radical shift witnessed in the broader market environment since the summer of 2014. This matters, as it indicates that while China might succeed temporarily in stabilising the Chinese yuan (CNY) and its local markets (much as it did in September 2015), or oil might find some temporary updrafts, the key issue will remain relative to demand for the USD. With the Fed is still signalling that it intends to further tighten policy, and other developed world central banks are increasingly erring on the dovish side (most notably the ECB), a reasonable argument can be made that the USD will remain in demand for some time to come. If true, this leaves those nations still defending their currencies with an uncomfortable choice at some point: either follow Russia's decision to stop throwing good money after bad (this, essentially, was President Putin's criticism of the Russian central bank at the end of 2014) and allow their currencies to take the strain, or face the potential prospect of continued hefty draws on their FX reserves. 2016 is therefore already shaping up to be one of the more interesting years for the currency markets in quite some time.

Even the quieter months saw sharp outflows with USD 71 Bn being wiped off the value of the nation's holdings in March and a further USD 87 Bn in November. While the overall decline in the value of China's FX reserves since the summer of 2014 peak may only have been 16% and may partially be accounted for by valuation shifts, this still represents a decline of over USD 660 Bn. This is roughly three times the size of China's reserves at the start of 2002 and twice the size of Russia's at the end of December of last year. If there is any one symbol (other than the decline in oil prices to the kind of levels last seen back in 2002/2003) of the astonishing change in the financial environment since the summer of 2014, this number is it. It is also worth highlighting that China's stock markets continue to suffer.

Simon Derrick Chief Currency Strategist BNY Mellon The views in this article are those of the author only, do not constitute investment advice, and may not reflect the views of BNY Mellon.

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-continuous forecasting makes business faster and surer Jon Louvar, Director of Planning Strategy, the Hubble team at explains

We humans are amazing. It has taken about seven decades of cooperative technological endeavour to bring robots even close to the skill of a human being walking on rough ground – something that tiny babies can master in a month or two. We can achieve this because our senses provide continuous feedback from every movement and adjustment. If that baby had to go through all the calculations made by robotic developers in learning to emulate walking… Well, just forget it. Most of us learn these, and other motor skills, well enough to get through the competitive pressures of everyday life, and that is sufficient. But some people go on to amazing heights – just think of the split second precision, timing, and judgement required by trapeze artists or tennis champions. Our ability to gain insight and foresight from continuous feedback is unlimited and can, with training, lead to unbelievable levels of performance. What would happen to a business if it could be guided by continuous forecasting instead of the traditional year-end forecasts? The latest enterprise performance management solutions are getting closer to that ideal and – as business learns to use it – the benefits are looking impressive. 88

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The need for agile decision-making

Manufacturing companies who need to budget for next year’s raw materials plan their purchases and targets well in advance in a relatively stable trading environment. So performance management for a typical CFO has long relied on a fixed system of annual plans, targets, and forecasts. But manufacturing no longer dominates Western business, and we face a far less predictable business environment where start-up rivals can appear from no-where with new business models, like Uber and Airbnb. Instead of steady evolution, today’s business faces unpredictable, discontinuous changes, and customers can rapidly switch allegiance as well as demand new levels of service. Making wise decisions fast enough is no longer possible using yearly, or even monthly, reporting. It can take a hundred days and twenty per cent of management time to complete an annual budget, meanwhile operating and market conditions deviate from the budget assumptions until performance reporting becomes meaningless and opportunities get missed. As a reaction to this dynamic business environment, annual planning cycles are giving way to more frequent business reviews, supported by rolling forecasts that allow people to spot trends, patterns, and possible disruptions before their competitors do.

Today’s managers need to work with continuous forecasting and planning cycles based on key performance metrics in order to stay agile and competitive.

Continuous forecasting technology

New tools are being developed to deliver the necessary near real-time reporting and forecasting – and not just for the business community. As an example, consider how the rise in urban traffic makes it increasingly difficult to forecast how long any journey will take. So, for an important appointment, it becomes necessary to allow a lot of extra time. You may have been forewarned to avoid one main road because of roadwork – only to find that everyone else has been told the same and now the side roads are also jammed. As a solution, we now have Waze – the community-based traffic and navigation app that is continually updated by its own users to warn others of bad traffic, accidents and hold-ups. With an app like Waze, you get insight into traffic conditions on your route as they actually happen. Apps for weight watchers provide another example of the transition from hindsight to real-time data. The old way was to weigh yourself and get a measure of how well you have been managing your weight in the past few days – so you can try to do better next time.


Making wise decisions fast enough is no longer possible using yearly, or even monthly, reporting.

Jon Louvar Director of Planning Strategy, the Hubble team at

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But the latest iPhone apps invite you to take a picture of the plate of food before you and get an estimate of its calories while fitness trackers will tell you how many calories you are currently burning – again this is real time data that helps you make informed decisions on the fly. The latest techniques for continuous monitoring of blood sugar levels provide similar benefits for diabetic patients. Even with the latest portable self-measurement devices, the user only gets a record of the level at the time of measurement, while continuous measurement systems give real time measurements with algorithms to determine trends, recommend action or sound alerts to the user and parents, doctors or other parties as needed. Similarly in business: today’s more agile organizations are using insightsoftware. com’s Hubble platform to manage planning as a continuous, event-driven process that is not constrained by the financial year. It may still be appropriate to set regular strategic reviews or to hold a planning meeting in response to some major change, as one Fortune 50 company CFO explains: “Once the year is under way, we review performance twice a quarter. We ask questions about how we are doing, what’s changing in the market- place, what are the new opportunities that have arisen, and so forth. We might then produce a new estimate based on the latest knowledge. Plans never work out the way you expect, so you have to adjust as you go.”

Adjusting “as you go” not only requires near real-time data on key performance indicators, it also means making that data much more widely available across the organization. A special offer posted on the company website could trigger a surge in orders: so traditionally the website manager should inform the product manager, and the product manager should make enquiries to ensure adequate stocks and so on up and down the hierarchy and chains of command.

Waze – the community-based traffic and navigation app.

Unless this is done absolutely consistently according to best practice, there is always a chance that someone along the supply chain gets overlooked – maybe the goods are in stock, but a forklift driver is off sick. Instead, an automatic alert can be broadcast to all relevant parties, warning of a likely surge in demand and reducing the risk of human error. That last example touches two key points: 1) an alert, and 2) only sent to relevant parties. Today’s automated systems are not programmed to swamp every busy staff member with a flood of irrelevant data. Someone in charge of stocks can be forewarned about special offers and promotions that could cause a surge in demand, but need not know about every other website update. So the best solutions allow each user to tailor their own dashboard to deliver the type and format of data they really want.

The rise of the algorithm

Forewarning of a surge in demand is useful, but how big a surge can we expect? Here the most advanced reporting systems provide for fixed or self- learning adaptive algorithms. So a special offer being launched on a website might register a number of factors such as the magnitude of the reduction, the size, and distribution of the banner ad, the time of the announcement, current purchasing rates, competitors’ activity and so on. Then an appropriate algorithm could make an order of magnitude prediction of the expected sales increase based on these figures and on past experience.The use of such algorithms could be the “next big thing” according to senior vice president of Gartner Research Peter Sondergaard, speaking at the 2015 Gartner Symposium: “Data is inherently dumb. It doesn’t do anything unless you know how to use it and act with it. Issue 3




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Algorithm is where the real value lies. Algorithms define action.” In particular, you can generate algorithms based on Key Performance Indicators (KPIs) that can include both internal data – such as the number of customers currently on your website or in your retail outlets – and external data such as the weather, competitors’ activity, inflation and other economic data. In doing so, the algorithms can actually reduce the data flood by selecting only those KPIs and ignoring lesser factors unless they reach a critical level. Adaptive organizations respond quickly because they respond to important, relevant data. Many more people across the organization have something useful to input into such a system, and many more can make efficient decisions given appropriate and relevant access to the resulting performance data. Automation allows the business to focus more on performance and its drivers, instead of just gathering data in the light of assumptions made in the last budget. According to the CFO of a Santa Barbara phone-call tracking business, it means: “You can capture data that’s not always necessarily financial in nature and bring it into reporting or analysis tools, and that’s something that is really, really new. Companies are seeing that there’s huge benefit to that in terms of predictive analysis…it forces the finance group to evolve and become really much more focused on analytics…” Another reason to replace annual budgets with continuous forecasting is that budgeting demotivates people – no-one looks forward to the budgeting operation. It is seen as a bureaucratic procedure that takes time and energy away from the day’s work, whereas continuous forecasting becomes an integral part of normal operation.

When will this happen?

Surveys suggest that most large organizations are serious about managing strategy rather than numbers, and want a suitable planning and forecasting model that offers immediate visibility without drowning them in targets and measures. Continuous forecasting is still new, and we are on the learning curve. But go-ahead companies are already reducing the flow

of manually entered spreadsheets, and replacing them with automated reports that ensure consistent data across the organization. One such – the leading global facilities management company ISS – was able to weed out thousands of redundant, error-prone spreadsheets and accelerate their budgeting cycle in the first year, claiming that they were “creating time instead of chaos” with benefits seen far and wide across the organisation. Sports equipment company, Mizuno USA, is moving from annual budgeting to a more continuous forecasting process that cuts days off their financial month- end close reporting. Their Senior Financial Business Analyst, Seth Higdon, works with the supply, marketing team, sales and product teams providing reports generated by Hubble’s reporting and analytics solution. The immediate result has been improved collaboration and: “Better real-time decisions from the guys getting these reports… Hubble's really made Mizuno USA a much better-performing company.” For another customer, the Womble Company, based in Houston, Texas, the emphasis has been on improving response to customer queries with real-time reporting, while Zuffa – the company managing the UFC (Ultimate Fighting Competition) – is using real- time reporting to be more responsive to business opportunities and increase profitability.


In these, and other examples, the shift from historic data and manual spreadsheets – towards automated access to real-time data plus customized alerts and analysis of trends – is already under way and showing positive benefits. But there is also a general feeling that this is the way forward and that there is much more that can be achieved in terms of continuous forecasting. The focus so far is on agility and competitive advantage, but there are also important implications for accountability and compliance. While traditional spreadsheet data passes up the business hierarchy, it is subject to manual revision. This can lead to problems, such as a department failing to meet targets that had been revised unrealistically elsewhere in the organisation. Automated reporting not only passes out consistent data to everyone, but it also keeps a full record of that data and any revisions that would provide a clear audit trail if needed. Going back to the analogy between continuous forecasting and human learning: business today is accelerating from a crawl to a walk to a fast jog – but there is still a lot of learning before we can compete at the level of an Olympic gold medallist. Issue 3



Monica Defend Head of Global Asset Allocation Research, Pioneer Investments


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THREAT The prolonged slide in oil prices to early 2000s levels has in our view profound implications for the economic outlook and financial markets. In this piece, we try to answer some of the key questions that the oil weakness has raised, with a specific focus on investment consequences.

U.S. Imports of Crude Oil and Petroleum Products (Thousand Barrels per Day)

1.What Forces are Driving Oil?

Thousand Barrels per Day

OR CHANCE? 8000 6000 4000 2000 2015
















Source: EIA, February 17, 2016.


0 In particular, China’s slowdown has been one of the most important contributors to the weakness of oil (and commodities) prices. China’s evolving economic structure is moving towards domestic consumption and away from heavy manufacturing and 100 3,0 exports, 98 marking a structural change for future demand. 2,5


20 11 20 1 Q1 1 20 1 Q3 2 20 1 Q1 2 20 1 Q3 3 20 1 Q1 3 20 1 Q3 4 20 1 Q1 4 20 15 Q3 20 1 Q1 5 20 1 Q3 6 20 1 Q1 6 20 1 Q3 7 20 17

96 2,0 94 1,5 Such 92 developments affect oil prices, but more so metal prices. 1,0 90 of a stronger-than-expected deceleration of Chinese growth 0,5 The fear 88 at the86 end of 2015 has led the most recent wave of oil declines, 0,0 -0,5 almost 84halving the price between the summer and the January lows. -1,0 82 -1,5

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20 15 10 5 0

Mln Barrels per day

Another factor to consider is not only the excess of oil supply but the prolonged excess of supply over time that poses problems 500 with respect to physical storage, putting pressure on spot prices 400 and the forward curve. If demand shocks are not the main culprit of the300oil price decline, in our opinion, the lack of strength in global growth has clearly contributed to widen the gap between supply 200 and demand.


With OPEC so far determined not to cut production and Iran pumping additional barrels into the market as sanctions have been lifted, there is more oil being supplied than the market can absorb. Added to this is the wave of production from the US energy revolution, which has lowered oil imports over the last decade.


Index rebased at 100 Q1 2004

An oil price slump driven by globally weaker demand would probably not be growth friendly – declines in net exports, lower investment and spiraling deflationary forces would put further pressure on growth. In the current economic framework, we can identify the presence of both a supply shock (which seems to be dominant) and a demand slowdown behind the oil price decline.



However, even in the case of a supply shock, grey areas would emerge. If, for example, the shock is prolonged or repeated, inflation expectations would tend to incorporate the decline in oil prices. As price and wage settings are a function of inflation expectations, we could see a negative impact on core inflation as well. Investment decisions and growth would be negatively affected.


Mln Barrels per day

In order to assess the effects of oil price swings, we believe it is important to first look at the forces behind them. In a simplified world, we could say that an oil price decline driven by excess supply should be positive for economic growth as disposable income rises and, consequently, demand for consumption and investment increases. Headline inflation would temporarily drop but core inflation would stay resilient. As the base effect of lower oil prices is absorbed, headline inflation should revert to pre-shock levels.



Thousand Barr

8000 6000

















0 16000




500 8000


400 6000


300 4000


200 2000


Chinese Secondary Sector (RS)

Brent Price (LS, Rebased)
















1000 0


Thousand Barrels per Day Index rebased at 100 Q1 2004

China Rebalancing Weighting on Oil and Metal 12000 Commodities Prices 10000


Base Metal Index (LS, Rebased)

Source: 100 Bloomberg, CEIC, Pioneer Investments, as of February 17, 2016.

Mln Barrels per day

Mln Barrels Index rebased at 100per Q1 day 2004


3,0 500 98 2,5 20 96 2,0 Looking ahead, we see some stabilizing forces for oil prices coming 400 94 1,5 15 92the gradual closing of the supply and demand gap in 2017 1,0 with 300 90 0,5 10 (a reduced pace of growth in oil supply mainly driven by non-OPEC 88 0,0 200 86 producers and a gradual post-sanction return to full capacity -0,5 by 5 84 100 Iran) and draw on oil inventories in the second half of 2017. -1,0 82 -1,5 0

20 11 20 1 Q1 1 20 12 Q3 20 1 Q1 2 20 1 Q3 3 20 1 Q1 3 20 1 Q3 4 20 1 Q1 4 20 15 Q3 20 1 Q1 5 20 1 Q3 6 20 1 Q1 6 20 1 Q3 7 20 17


3,0 2,5 2,0 1,5 1,0 0,5 0,0 -0,5 -1,0 -1,5

Mln Barrels per day


100 98 96 94 92 90 88 86 84 82 Q1

20 1 Q3 1 20 1 Q1 1 20 12 Q3 20 1 Q1 2 20 1 Q3 3 20 1 Q1 3 20 1 Q3 4 20 1 Q1 4 20 15 Q3 20 1 Q1 5 20 1 Q3 6 20 1 Q1 6 20 1 Q3 7 20 17

Mln Barrels per day


World Liquid Fuel Production and Consumption Balance (Million Barrels per Day)

Oversupply (right axis)

World production (left axis)

2. What Impact on Growth and Inflation?

If we include the above scenario for oil prices, our outlook for the global economy remains moderately positive. Although revised marginally down, our world trade forecasts (and implicitly our assessment of a recession probability) remain benign; we do not see a collapse in world trade following a sharp contraction in 80 any major country, particularly in China. 60

In our opinion, the excess supply story had a substantial role in the oil correction, so we may expect some support on demand 20 especially for consumption (this is already visible in countries with higher elasticity of consumption to disposable income). 0 40

Contribution to Global GDP Growth

Base Metal Index (LS, Rebased)


Source: EIA, February 16, 2015.

Note the outlook for the US is to reduce the amount of oil it supplies to the market.In this scenario we see the possibility of a rebound of oil towards 45/50 USD per barrel by the end of 2017.

West Texas Intermediate (WTI) Crude Oil Price (dollars per barrel) 80

2 %

If our central case of China transitioning relatively smoothly and avoiding a hard landing materializes, we expect the demand for commodities to keep growing in 2016, albeit at a slower pace than in the past. Partly offsetting the Chinese slowdown, if US and European economies remain resilient, this could give some support to oil demand, and help to gradually reduce the overcapacity gap.


-2 -4

-4 BRIC Other EM EU (UK included) US Other DM 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: Bloomberg, IMF, Pioneer Investments, Thomson Reuters Datastream. Data as of February 22, 2016. BRIC

20 0

Historical spot price

STEO price forecast

NYMEX futures price

Source: Short-Term Energy Outlook, January 2016, Pioneer Investments. STEO means short term energy outlook.


Global Growth with Forecasts



4 Issue 3 2

EU (UK included)


Other DM

On2,2 the inflation side, lower oil and commodity prices have 2,0 contributed to further lowering the inflation path. Inflation1,8 related market indicators (inflation swap forward 5Y5Y) indicate 1,6 that 1,4headline inflation is perceived as likely to stay low, which makes the central banksâ&#x20AC;&#x2122; goal of keeping inflation expectations 1,2 anchored quite challenging. However, it is worth noting that core inflation (which excludes energy and food) is gradually recovering, although more so in the US than in Europe.



Other EM

We believe economies that are increasingly relying on the service sectors (typically Developed Markets) rather than 3,2 manufacturing or natural resources, and are less linked to 3,0 commodity and oil prices, are generally more resilient to the 2,8 downturn in commodity prices. 2,6 2,4



Global Growth with Forecasts


0% -10% -20%


3,2 3,0 2,8 2,6

2,4 In Europe, the decline in oil prices is expected to bring further fuel to 2,2 private consumption that was the main engine of Eurozone 2,0 growth in 2015. We also expect a positive contribution to growth 1,8 from investment, triggered by the lower oil price. While declining oil 1,6 prices 1,4 act as a drag on inflation in the Eurozone, the sensitivity of 1,2 fuel prices (the one directly perceived by customers) to falling auto oil prices is probably overestimated.


80 60 40 20 0

Change in Brent Crude Oil Prices (Loc. Curr.) and Auto Fuel Prices (Dec 2012 to Dec 2015)


Global Growth with Forecasts Price Change (%)



2 0


0% -10% -20% -30% -40% -50% -60% -70% -80% -90%




2006 BRIC



Other EM




EU (UK included)

2018 US

Falling Inflation Expectations, Especially in Europe




Other DM

3,2 3,0 2,8

Auto Fuel Change Crude change Auto Fuel Change Crude change Source: Pioneer Investments. Datastream data as of January 28, 2016.

If we engage in the same exercise for the US, an average 10 USD/ bl move lower for oil prices than in our central case scenario for 2016 ceteris paribus would further impact inflation, by lowering our projections over 2016 by 0.2% YoY on average. GDP, Personal Consumption Expenditures and Gross Fixed Capital Formation should be impacted positively, in both 2016 and 2017, instead.

2,6 %

2,4 2,2 2,0 1,8 1,6 1,4 1,2

US inflation swap forward 5Y 5Y

EU inflation swap forward 5Y 5Y

Source: Bloomberg, Pioneer Investments, data as of February 16, 2016.

Price Change (%)

0% 3. Who are the Winners and Losers in the -10% -20% Oil-30% Price Plunge?

-40% -50% Oil prices have declined about 50% since the summer of 2015. -60% The-70% immediate consequence of such a move is a wealth transfer -80% -90% from oil exporting countries to oil importers.

In the US, the scenario in which oil prices are lower but do not follow a persistent downward spiral strengthens case for a Auto Fuel Change Crudethe change resilient Personal Consumption Expenditure as the main contributor for growth. In fact, we expect consumption to benefit from higher real disposable income (coming from mild wage increases and lower projected inflation rather than from further strong gains on the employment side). We expect some downside pressure on the outlook from Investments in energy related sectors and manufacturing sectors, and also via weak export performance. Stressing our forecasting model for a persistent 10 USD drop in oil prices (oil prices remaining around 30 USD/bl persistently over the next 8 quarters) would leave GDP growth almost unchanged, as the improved consumption growth would be offset by lower investments growth. On inflation, persistently low oil should drive a 0.4% YoY fall of headline CPI in both 2016 and 2017.

In Japan, the growth outlook is quite weak. However, GDP growth in 2016 should be driven more by internal demand components, such as consumption and investment, in contrast to the “poor quality” of growth seen in 2015, when 0.5% out of 0.7% of GDP yearly growth was contributed by Inventory accumulation. Stressing the model for the 10 USD oil price decline, ceteris paribus, would lower GDP mainly because of the drop in investments, and would lower the inflation path. We continue to expect a mild positive trend going forward, but inflation will remain increasingly distant from the Central Bank's target of 2.0% YoY. In EM, the first visible impact of the collapse in oil price has been a deterioration of the overall outlook: the not-so-rosy picture provided at the end of 2015 has weakened a bit further, exacerbating the dichotomy between commodities/oil exporters and net importers. The chart below gives a clearer picture of the countries enjoying the oil dividend and the countries suffering from depressed oil prices.

Oil Net Balance (Export – Import) on GDP Net Importers

Net Exporters Russia Colombia Mexico Malaysia Brazil Australia US China Indonesia Turkey Japan Philippines Hong Kong Chile India South Africa South Korea Thailand Taiwan







Source: Pioneer Investments. Datastream data as of January 28, 2016.

60% 40%

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AMERICAS INVESTMENT We have identified two main themes relevant from the perspective of EM economies, inflation and fiscal balance: „„ Inflation developments are mixed and reflect, on one side, weaker domestic demand and lower commodity prices and, on the other side, the effects of currency depreciation through imported inflation. Countries facing the risks of excessive currency depreciation and capital outflows may have limited scope for future monetary policy easing to boost the economies. „„ Commodity exporters are facing a shortfall of revenues; the challenge for them is to adjust their economies to lower commodity revenues – improving fiscal efficiency, increasing revenues from different sources – without making drastic cuts in expenditure which could exacerbate the damage to their economies. It is worth adding that in addition to oil other commodity prices Net Importers Net Exporters areRussia at historical lows as well, making the group of countries Colombia expected to benefit from the oil collapse less crowded. Mexico Malaysiathis perspective, other countries at risk are South Africa, From Brazil AustraliaIndonesia, Australia, Brazil and Malaysia. Chile,

US China Indonesia Turkey Japan Philippines Hong Kong Chile India South Africa South Korea Thailand Taiwan Russia

4. What are the Investment Implications?

We have observed that financial markets have framed the slide in oil prices more as a demand-side shock (with negative effects), than a supply side shock. In recent weeks, correlations of all assets versus Net oil have increased substantially and equity markets Net Importers Exporters have traded very closely with oil prices.

Colombia 15,00% Mexico Malaysia Brazil Australia US China 60% Indonesia Turkey Japan 40% Philippines Hong Kong 20% Chile India South Africa 0% South Korea Thailand Taiwan -20%






Correlation of US Equity and US 10 Y Treasury versus Oil

15,00% -40%






correlation equity vs oil correlation US yield vs oil 60% Source: Bloomberg, data as February 8th 2016. S&P500 index considered. 40% 25

We believe that the market selloff has generated price dislocations that20could offer interesting opportunities for investors. It has 0%pushed up yields in the riskier side of the credit market – i.e., US 15 Yield where the energy component weight is about 10% – -20%High 10 well above the 10-year average, to levels that incorporate a very -40% 5 negative scenario for oil prices. This price action has also affected the EM 0 universe, with bond yields reaching five year highs %


(Source: Bloomberg, February 17, 2016, JPM EMBI Global Blended Index).

US High Yield – Yield to Worst2 25

Indeed, the energy sector has been hard hit by the fall of oil prices and the default rate is expected to rise in 2016 from 3.4% in 2015 (Source: Fitch, January 26 2016) as many of the high-yield oil companies cannot operate profitably with oil below the 50 to 70 USD barrel range. However, we believe the market is now discounting an extreme situation in terms of defaults: assuming that the oil price remains close to current levels over the next five years, which is not our main scenario. (Read also Outlook Update for US Asset Classes, January 2016). Additionally, the spillover effects on other sectors should remain contained. The energy sector now accounts for a small share of total US employment, after declining consistently since the 80s, and the sector’s share of GDP is quite limited. If our macro scenario holds (oil price stabilization, China slowdown but no hard landing, very slow normalization of Fed policy and relative resilience of US economy) the recent selloff can provide opportunities to investors, especially in terms of income. We should, however, acknowledge that volatility is expected to remain very high, and therefore we believe a long-term approach is needed. At the same time, a re-rating of inflation expectations has hit inflation-related assets (i.e., bond linkers), which now discount a very negative outlook. We believe that the market is underestimating the inflation pressures that could come from wage growth (in the US), and therefore we believe that opportunities may open up in the linkers segment. On the Central Bank side, we see a more dovish tone overall (compared to our outlook at the start of the year) driven by a weak inflation scenario and financial stability concerns. We believe that a synchronicity will continue to be the name of the game, with the Fed slowly normalizing rates, the ECB ready for another wave of unconventional measures and the Bank of Japan recently moving into negative rate territory. This should open up relative value positions among currencies and yield curves. For EM equities, due to the historical high correlation between oil and global demand, lower oil is taken as a proxy of the global cycle, hence as “bad news”. This is true especially for Korea, Indonesia, Czech Republic and Brazil (Indonesia and Brazil’s economy are also very linked to oil). Some exceptions are Hungary, Turkey and Poland, where lower oil could drive a higher upside as oil is mainly a cost variable.

Selectivity will continue to be key in the EM area. Here we prefer countries, such as India, that have the space and credibility for adjustment and rebalancing the economy, and that can also enjoy the oil dividend.



15 10 5 0

Source: Bloomberg, data as of February 16, 2016. Barclays US Corp. High Yield.



The lowest potential yield that can be received without the issuer actually defaulting.

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Middle East

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UAE WEALTH MANAGEMENT AND HOME FINANCING Noor Bank (then Noor Islamic Bank) was established when the global financial crisis broke in 2008. As a young, innovative and progressive bank with none of the legacy issues common among more established banks, Noor Bank was able not only to ride out the financial storm that engulfed the world but eventually thrive. This was because of its prudent growth strategy that prioritised the fundamentals of capital and liquidity management, aligned with competitive and dynamic financial services and solutions. Today Noor Bank is a leader in the Islamic banking space. In 2014, the bank rebranded – from Noor Islamic Bank to Noor Bank - in a strategic move to appeal to a wider range of customers, both Muslims and non-Muslims, in the UAE and abroad. The bank still remains Shari’a Compliant at its core and continues to maximise returns for customers by eliminating unfavorable functions, including hidden fees, complicated charges and inflexible services. Today, in line with its business promise ‘Noor Gets It Done’, Noor Bank provides financial services to a new generation of always connected customers who want instant and constant access to banking whenever, wherever and however they desire.

The bank has addressed the needs of its tech savvy customers by leading the way in implementing mobile and online banking services, including offering the first Arabic enabled mobile internet Islamic banking service in the Middle East. Today, Noor Bank continues to place technology and digitisation at the forefront of the products it offers. Since its beginning, the bank has significantly increased its profitability, client base, and asset infrastructure, consistently recording year-on-year growth. Most recently, Noor Bank chalked up net profits of AED272 million for the first six months ending June 30, 2015, up 26% from the same period last year. In the first half of 2015, Noor Bank’s assets crossed the US$10 billion mark for the first time. 2015 has been a strong year for the bank, with many milestones. These include the launch of its debut $500 million global Sukuk, which was well received worldwide, with around 45% allocated to European and Asian investors. The bank also expanded its Shari’a compliant service dedicated to the financing of SME’s - Noor Trade - to ensure that it can service prime small and medium enterprises operating in commercial zones such as Al Quoz and the adjoining business centres. Issue 3



To find out more about the wealth management and home financing opportunities taking place in the UAE Global Banking & Finance Review spoke with Renoy Kundukulam, Head of Priority Banking at Noor Bank and Pawan Dhawan Noor Banks Head of Home Finance. With competition on the rise in the priority banking business, how does Noor Bank stand apart from their competitors? Renoy Kundukulam: ‘Noor Gets It Done’ is not just a core value of our brand, it is a belief with which each employee comes to work to ensure a better experience for our clients. It is this attitude which sets us apart from our competition. Our offshore proposition, aligned with a low client to Relationship Manager Ratio (which offers higher personal attention by each RM to clients that they manage) and the fact we are a young, growing bank, that is nimble-footed and flexible, gives us a winning combination. In today’s volatile market, this is a significant advantage for any customer. At Noor Bank, we strive to be the trusted bank for our wealth management clients, where our clients see value in our asset allocation model driven investment portfolio management philosophy. We prefer a risk-based approach rather than a product based approach. Our bankers work with the clients to help them choose the most suitable investment products in line with client’s risk appetite and financial objectives. Relationships based on value help to create loyalty among clients and strong barriers for our competition.

Renoy Kundukulam Head of Priority Banking Noor Bank


Issue 3


Who are the UAE’s high-net worth individuals? Renoy Kundukulam: The UAE promotes entrepreneurial ventures based on trade, real estate, technology, and innovation, reflected in the fact the majority of the High Net-Worth Individuals are self-made businessmen and women, with a smaller portion being represented by professionals from across the globe. At Noor Bank, a third of our High Net-Worth Individual clients are from the Middle East, another one-third from Asia and the remaining mix from Africa, Europe, and the Americas.

impacted by the market dynamics globally and regionally, such as the lower oil price and higher levels of volatility. They are waiting for the opportune moment to move away from a preservation approach and are diversifying their investment portfolios. As shown by decades of financial market data, this is the correct approach to risk management.

The UAE wealth report, at the start of 2015, said there were approximately 72,100 millionaires (with net assets of $1 million or more) living in the UAE, with a combined wealth of over $300 billion. The UAE is also home for 1,275 ultra-high-net-worth individuals with net assets of US$30 million dollars or more. Around 495 of them live in Dubai, while 450 reside in Abu Dhabi. Across the Middle East, there are 5,975 of these tycoons.

How does your priority banking unit help clients manage their daily finances and achieve their long-term financial goals? Renoy Kundukulam: When it comes to managing finances, one of the primary needs our clients have is the ability to manage liquidity. Idle money does not grow. However, investing tends to lock in liquidity. To meet this requirement, we offer instruments that invest into capital markets with capital preservation strategies and offer liquidity anytime - without having to compromise on returns. This way our clients earn decent returns while enjoying liquidity for their business needs.

How have their attitudes towards wealth management changed over the past few years? Renoy Kundukulam: One change we have noticed is that the age profile has fallen, and younger investors have shown a higher risk appetite, shifting from primarily physical assets to financial assets. Many of these younger HNWI are sophisticatedly aggressive and experiment with higheryielding financial instruments from different asset classes.

We also train our Relationship Managers on a weekly basis and share market updates on a daily basis, to keep them informed of any new developments in the financial world that could affect their clients’ investments, or to identify new opportunities for their clients. While we do suggest tactical changes to the portfolio to benefit from short-term volatility, we also ensure clients do not lose sight of their long-term strategic goals.

In most developed markets and many emerging markets, banks tend to focus on local markets. For instance, European investors are primarily offered bonds, or equities, from Europe and the same is the case with India or Pakistan. However, in the UAE clients look at investment opportunities from various geographies. For instance, at Noor Bank, we have clients investing in structured deposits linked to a European sustainable index, or Mutual funds focused on developed markets such as the U.S., or even Emerging Market funds from Asia.

Thirdly, we have a highly experienced team of Relationship Managers who cater to the needs of our offshore clients. So our High Net-Worth Individual clients do not have to travel to transact, instead, we reach out to them to help them make personalised investment decisions.

Secondly, learning from their previous experiences, during the Sub-prime crisis in 2008, more and more investors are opting for well-diversified investment portfolios with tailored products that suit their needs. Finally, investor attitudes have been

How does Noor Bank help international clients with their wealth management needs? Renoy Kundukulam: As a highly flexible young organization, we provide our offshore clients with dedicated Relationship Managers allocated to different geographies to service their banking needs. There is a large base of clients in many of our target markets, where there is a higher concentration of clients who prefer Islamic banking. Our teams travel and reach out to these clients in their respective geographies to

help them choose the appropriate products and services they need. We understand that clients in different geographies have different needs. For instance, in the Middle East, investors are more focused on growth of wealth rather than just preservation – and hence, look for investments with a strong yield. Because of this, we manage their money in an appropriate manner and provide tactical opportunities that can give impetus for growth to the overall portfolio of the client whereas a European client might look for capital preservation. What are some of the products that you offer to your customers? Renoy Kundukulam: Through tie-ups with local and international partners, as well as an award-winning in-house treasury structuring team, our Priority Banking offers a wide range of wealth management products that cater to all four quadrants of our clients’ financial needs including savings and deposits, borrowing, protection, and convenience. We offer a wide range of Shari’a compliant mutual funds for investors who are interested in long-term capital appreciation. Our income-oriented customers can choose from a wide selection of Sukuk (Islamic bonds) with a variety of credit quality, maturities, and yields to meet their individual objectives. For those who prefer to safely participate in the global equity markets, forex, commodities or a combination of different asset classes, we offer structured deposit schemes with capital protection. For example, our Noor Sustainable Shari’a European Equities Linked structured deposit allows investors to participate in Shari’a compliant European equities, without risking their capital and delivers a minimum assured return. Our range of Takaful products take care of our client’s protection and regular savings needs. As a leading retail bank, we are well-equipped to manage other financial needs with enhanced offerings for Priority clients, such as Home Finance, Personal finance, and credit cards. Thus, the Priority proposition ensures that our clients have not only a wholesome banking experience but also exclusive lifestyle benefits. Issue 3



Research indicates that the housing market is expected to bottom out mid-year and start to pick up towards the end of the year.

Pawan Dhawan Head of Home Finance Noor Bank


Issue 3


Noor Bank saw an improvement in market share in the home financing sector. To what do you attribute this success? Pawan Dhawan: Noor Bank’s Home Finance acquisition volumes have grown significantly over the last couple of years, and we have managed to secure a place among the leading home finance lenders in UAE. This achievement can be attributed to a number of critical factors which helped in revitalising the business model, supported by a robust strategy. Though the overall residential home finance market has contracted due to a slowdown in the real estate sector, at Noor Bank, we have managed to increase our market share through expansion of our distribution engine, investing in quality resources, focusing on customer experience and innovation, diversification into higher yielding products / segments, and innovative product offerings and plans. We were in the right place, at the right time, and with the right team. What options do you have available for UAE residents and non-residents? Pawan Dhawan: We offer a comprehensive suite of products and solutions covering segments, geographies, and features under Noor Bank’s home finance umbrella. Our Home Finance proposition caters to completed and off-plan properties for residents, and non-residents of the UAE. Attractive and flexible solutions are available for salaried, as well as selfemployed people, which caters to the needs of our clients in both residential and commercial property space. Noor Bank offers the following products to residents and non-residents: „„ New Purchase / Resale / Buyout Finance „„ Fixed Rate finance „„ Equity Release for new as well as existing Home Finance clients (for residents only) „„ Off Plan Property Finance „„ Flexi Home Finance (for residents only) „„ Commercial Property Finance (for residents only) What niche segment products do you offer? Pawan Dhawan: Flexi Home Finance is one offering targeted towards a niche market of customers who are interested in pure investment options. We are the only Islamic

bank, and one of the very few regional banks, offering this innovative product variant. As part of our efforts to leverage the mature and stable property market in the UAE, Noor Bank offers Flexi Home Finance to clients who have a long-term approach to their finances and need some respite during the initial years of commitment. Clients can choose to pay a variable rental portion of their instalments during a two, or three, year initial period. This applies to those opting for a one-year finance rate with annual re-pricing. The objective is to help clients reduce their monthly instalments and facilitate flexible and convenient finances with Noor Bank. Another unique proposition is our financing for the commercial property segment. Noor Bank’s initiative to launch Commercial Property Finance came at a time when the market showed demand among self-employed businessmen, SMEs and corporates for commercial financing towards the purchase of office space and retail outlets for end use, expansion, or investment. The product allows selfemployed clients to purchase office space, or retail outlets, on attractive terms. How difficult is it to apply? Pawan Dhawan: The application process is simple and convenient, with minimal documentation required for underwriting the application. Clients can visit noorbank. com and click ‘Apply now’ in the Home Finance section. A brief online application has to be completed for a lead to be generated and a relationship officer then contacts the client. Alternatively, the applicant can email his interest, or query, to homefinance@, or call 800-6667 and a Relationship Officer will contact the customer, in order to discuss this, or her financial needs and then recommend the best solution. Home finance clients are given a Home Finance Guide, which sets out, in detail, the documentation required, as well as the end-to-end process outline for applying for home finance. A dedicated Relationship Officer guides the client throughout the process, and keeps him, or her, informed of the policies, and procedures at every step.

What are your expectations for the UAE real estate sector in 2016? Pawan Dhawan: The fundamental drivers of the UAE’s real estate remain strong. The UAE is known as a 'safe haven' business and financial hub, within a volatile region. Long term investors can factor in the growth generated in the run-up to Expo 2020 and evolution of Dubai as a center of Islamic finance. Political stability, superior infrastructure, a tax-free environment, respectable rental yields and freehold property status, contribute to making the UAE an attractive destination. This is highlighted by the fact that non-resident and international buyers continue to invest in the UAE, with overall transactions increasing from AED 218 billion to AED 267 billion last year according to the Dubai Land Department. Research indicates that the housing market is expected to bottom out mid-year and start to pick up towards the end of the year. As the economy diversifies, demand for residential and commercial spaces will help push property prices upwards. Reputable research firms indicate that the average price correction in 2016 is expected to be 6%-8%, and real estate insiders forecast that market conditions will favor buyers over the next 12 months. The momentum of the fall in prices moderated in December; construction volume looks dynamic, and the strong US dollar and low oil prices are likely to remain headwinds for the real estate sector in 2016. On the other hand, government initiatives, totaling some AED300 billion, have been announced in sectors such as education, health, energy, transportation, space, and water, with the objective of building a knowledge-based economy. These efforts are likely to increase the percentage of knowledge workers in the country to 40 percent by 2021, thereby aiding demand for real estate as well. Furthermore, major government infrastructure projects are already committed, such as the Dubai World Central (DWC), Al Maktoum International Airport and Expo 2020, which will also create employment opportunities and help drive demand for housing in the medium to long term. Issue 3



FLEXIBLE Working Relies On Trust And An ‘Outcomes’ Focus

I was reading an article last month about a creative agency, Potato that has ditched the traditional nine to five model. There are no fixed working hours and staff are allowed to turn up and leave work whatever time they like – as long as the work gets done. In this article, the Chief Executive of the business, Jason Cartwright, commented: “We work on the basis that creative, complex work just doesn’t fit nicely into the nine to five mould, and the same is true for the 40-hour work week. Instead, we give our teams the responsibility of managing their time, believing that they are the best judges of the time that needs to be put in to achieve the best result on a project. By opening up the working day, we can cater to people’s workplace idiosyncrasies to let them do what feels right rather than what a company policy says is right.” As a result, Potato says that it has significantly improved staff retention and importantly its turnover. This got me thinking about how much the workplace and organisations have changed in the last few years, largely as a result of the mobile revolution. Now employees can work just about anywhere and the traditional structures and ways of working are debatable. At the same time, I also wonder how conducive it really is to have us all working from home or ‘on the go’ as we travel from one client meeting to another. How much is gained versus what is lost in the process? 106

Issue 3

We are often told that organisations need to be increasingly agile especially in what is described as the VUCA (volatile, uncertain, complex and ambiguous) environment in which we operate today. One of the ways in which many companies have responded is by introducing flexible working. This can have many dimensions, perhaps not as extreme as the Potato example, but that include contract flexibility (i.e. annual hours or specific time only contracts), time flexibility (i.e. no or limited core hours with staff able to flex their time during a day or week), and location flexibility (i.e. the ability to work in a range of locations both within the organisation’s buildings and beyond). Technology also plays a big part. The mobile revolution, smartphones and devices have enabled this ‘anywhere, anytime’ working pattern. And facilities like video conferencing, teleconferencing and telepresence are more commonplace now. That said when considering flexible working all organisations need to think through the approach and both the upsides and downsides and ensure that the practices and contracts you put in place will work. I recently heard of another organisation that implemented a working from home policy. In all their contracts employees were based from home and staff were paid expenses to either travel into the offices around the country or to customer sites and so on. Unfortunately, the company then put a ban on travel and employees were unable to leave home unless they paid for the travel themselves, which is a ridiculous scenario.

Andrew Moore COO DAV Management


Technology also plays a big part. The mobile revolution, smartphones and devices have enabled this â&#x20AC;&#x2DC;anywhere, anytimeâ&#x20AC;&#x2122; working pattern.

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The latest Thames Valley Business Barometer, a six-monthly survey that measures economic confidence in the region, also had a focus on flexible working. DAV was involved in the survey as a panel member. Of the 100+ companies surveyed, 75% have a flexible working policy in place, while a quarter don’t and are not looking to implement one. This is probably because they either run shift patterns or are so customer focused that it would be very hard to implement. In terms of barriers to flexible working the frequent ones cited were around trust, culture, evaluating productivity and being able to cover core hours, all of which resonates with me. For the virtual team model to work, I believe there has to be an enormous amount of trust between both parties. The deliverable, or how you rate performance, needs to be focused on outcomes rather than time spent at a desk. And of course, regular, anecdotal or formal feedback loops between employees and employer need to be factored in and, where possible, relevant inputs from clients.

Flexible working offers a lot of upsides such as improvements to staff retention. It can also make the organisation more attractive from a recruitment perspective and it can increase productivity. The downsides, however, are around management and control, maintaining culture, ensuring you have the right processes, controls and contracts in place and that you have thought through how staff will be motivated and, perhaps most importantly, whether the new environment is conducive to collaboration – a critical factor in the innovation process that sets market leading businesses apart. We face similar challenges at DAV, where our consultants, be they employees (as they were in the past), or independent associates (who comprise our delivery model today), spend the majority of their working time at client locations around the world. To support this, we work hard to create a sense of community, maintaining regular touch points and making virtual

support available across the extended team, where and when it’s needed. This ‘virtual’ team structure works for us due to the calibre and experience of our associates and the relationships we have formed, based on trust, integrity and hard work. I believe it’s these three elements that make or break any flexible working model. There’s no doubt that the world of work is radically changing and finding ways to keep the productivity, synergy and enthusiasm of the team together will need to be looked at in different ways. The challenge for many organisations will be around things like, how to replace those water cooler moments when the ebb and flow of the day’s happenings are chatted through in a relaxed and informal setting, but above all, it’s how to maintain those levels of trust between all parties. These things are so much harder but not impossible to replicate with a virtual team and does need to be considered thoroughly as we move into new mobile working patterns of the future. Issue 3



Blockchain can now be used to record virtually anything of value, or any tradable asset â&#x20AC;&#x201C; whether thatâ&#x20AC;&#x2122;s identity, a will, a deed, or almost any type of secure transfer of information or smart contract.


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Blockchain has the potential to profoundly affect the digital world and become the technological foundation for all electronic transactions over the Internet.

The benefits to anyone involved in trading or pricing assets are clear: the system reduces cost and complexity, creates shared trusted processes, improves discoverability (visibility), and enables trusted record keeping.

Originally designed to provide trust and security for trading with newly emerging cryptocurrencies, the technology enables a trustworthy digital record of asset ownership.

Exploring the possibilities

At its essence, blockchain is a distributed ledger shared via a peer-to-peer network. Each participant has a copy of the ledger’s data, and additions or changes to the chain are propagated throughout the network—but only after the parties in the transaction agree on it. This approach enables participants to dispense with a great deal of review and verification that adds to the cost and time it takes to complete transactions. One of the primary benefits is the transparency the system provides – so that all parties have insight into the transactions that have taken place. Keeping shared ledgers globally in sync ensures that assets (or importantly, parts of packaged assets) can be tracked almost instantly with a high degree of trust. There is added security against fraud or possible ‘dodgy dealing’ as the integrity and creditworthiness of any tradable asset will be easily seen.

While the technology got its start several years ago as a key ingredient of cryptocurrencies, the underlying blockchain technology can make a difference whenever valuable assets are transferred from one party to another. It can now be used to record virtually anything of value, or any tradable asset – whether that’s identity, a will, a deed, or almost any type of secure transfer of information or smart contract. But in many respects, blockchain is lacking some critical capabilities to make it ready for wide scale adoption by business. Until now, approaches to using the system have been narrowly focused, fragmented and inconsistent. Technical hurdles have made it challenging to use while significant security issues have gone unchecked. Many banks and technology companies are now investigating different versions of distributed ledgers inspired by the Bitcoin blockchain code, but only a cross-industry, open standards approach can rapidly move blockchain into the mainstream. Issue 3



Fulfilling the potential

To advance the use of blockchain technology for a wider range of applications from banking to supply chain to building permits, the non-profit Linux Foundation, IBM, major banks, start-ups, and other banking industry leaders, have instigated a new open source, ‘open ledger’ project. The goal is to remove the complexity from the blockchain layer, enabling a standards-based approach that can be rapidly adopted to fulfil the technology’s tremendous potential. The open source model ensures interoperability between blockchain applications. Also, by sharing the foundational layer, the participants can focus their efforts on creating and refining industry-specific applications, platforms, and hardware systems to support their needs. These industry-specific or functionspecific extensions of that technology, will be created and governed following the same principles. Banks, investment banks, financial marketplaces and insurance companies in particular are pioneers in exploring the possibilities of this system.

„„ Corporate treasury, accounts payable and receivable: Banks providing treasury services for their clients could use blockchain to pay vendor invoices immediately and win the highest net discount while immediately letting the client validate that the invoice was executed and the money paid. „„ Corporate loans: Customised and bespoke loan agreements between banks and their clients could be represented on a common platform and used to make loan syndication more transparent, efficient and safer. „„ Trade finance letters of credit: Blockchain could help drive out 99 per cent of the time and risk involved in issuing international letters of credit and processing the documentation required to validate performance. This would enable innovative financing solutions to be offered for a wider range of clients, including startups that are born global. Over the past two decades, the Internet has revolutionised many aspects of business and society, making individuals and organisations more productive. Yet

the basic mechanics of how people and organisations execute transactions with one another have not yet been updated for the digital age. The financial markets have faced a crisis in trust and so have been battered with regulation and scrutiny to force it back into practicable state.

Blockchain technology, used in the right context, can bring trust back to trade, and can bring to those traditionally opaque and complex processes the openness and efficiency we have come to expect in the Internet era.

Paul Moores Director, Banking & Financial Markets, IBM Financial Services

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steps to make it happen Of late, the words 'secure' and 'retailing' have rarely been seen in the same sentence due to the retail industry’s emergence as a favourite playground for hackers. This is underscored by the British Retail Consortium’s Retail Crime Survey, which found that the majority of retailers see cyber attacks as a critical threat to their business, with nearly two thirds targeted by hackers in the last 12 months. It's no wonder that the same survey showed that one third of consumers do not trust retail information security. In another survey, the 2015 Cloud Security report by Alert Logic, it was also observed that the types of attacks hackers use depends on a business’ online presence and how that business interacts with its customers. In retail, there are many touchpoints for a customer, including a significant presence online, where customer details, loyalty data, financial


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and credit card information are all stored, and are highly valuable to cyber criminals. These hackers are looking to exploit any weakness to obtain this data and monetise it quickly through a secondary market of criminals specialising in committing fraud. Offloading these stolen ‘goods’ has never been easier with the advent of the ‘dark web’ and online auctions and stores to sell them in an anonymous way. As hacker techniques are becoming more widespread and sophisticated, it is important to have a comprehensive security strategy in place. This is particularly pertinent given that IDC found that it takes on average 205 days for companies to detect attacks. The impact of these breaches can be catastrophic, especially in retail where brand reputation and loyalty are the keys to success. While securing a retail business can seem like a daunting task, there are six steps that can be taken immediately to help retailers not feel helpless against cyber attackers.

Richard Cassidy Technical Director EMEA Alert Logic


3. Adopt a patch management approach "Patch Tuesday" - where Microsoft acknowledges the latest patches available. Some are important, some less so. Don't ignore them. Prioritise the fixes and make the changes; and try and do so in a timely fashion. Make this someone's job, because once these are public, there may well be nuisance attackers that will still try and take advantage of the vulnerabilities - we always talk about the path of least resistance when it comes to cyber attackers; generally, the easiest way in to an organisation is going to be favoured over something more sophisticated. Attackers know that organisations are fighting this uphill battle when it comes to patching these vulnerabilities. Don't be caught out.

5. Stay informed on latest vulnerabilities, and build a security toolkit

1. Secure web applications This may seem obvious, but for retailers that use the internet, securing these applications is vital, especially if they collect any kind of consumer data like passwords and email addresses. Crucially, it's not just the payment and personal details sections that need securing; any script or click through need protecting too. Just ask the Jamie Oliver website team, which was hacked twice last year whereby malicious code was inserted into his (legitimate) website that triggered a nasty exploit kit that would infect visitors' computers.

2. Create access management policies Know who has access to what information within your organisation. If lower level employees have no reason to access critical business information, don't allow it. It can be a lengthy process to sort this out depending on what kind of information your organisation keeps, but there are tools to help identify critical information and make sure that only those who need to know it can access it.

Any security professional worth their salt will know that understanding the anatomy of an attack is the key to combating it. When they are kept up to date on the latest threats, it will go a long way towards building best security practices around this knowledge. There are plenty of free resources to help, including blogs, newsfeeds and forums. Using the information can help towards building an arsenal of security tools that will be vital to protecting the organisation.

6. Understand your Cloud Service Provider's security model The majority or retailers will have some cloud aspect to their IT infrastructure, and increasingly this is the ecommerce website that is the storefront for the retailer and interaction with customers. It is important to acknowledge and understand that CSPs are on the hook for securing their foundational infrastructure but the ecommerce applications hosted on that infrastructure are the responsibility of the retailer. This includes the security monitoring, vulnerability scanning, network threat detection etc. There is nothing more critical than understanding where each of the party's responsibilities lie, that way there is no blame game if the worst happens.

4.Review logs regularly Security logs contain records of login/ logout activity or other security-related events making them a goldmine of information, but are often one of the most under-utilised facets of security. A hackerâ&#x20AC;&#x2122;s attempt to get into your system will leave a digital trail that is obvious if you know what you are looking for. Creating a process which takes into account the revision of these logs to review the data against application, system and network level threats, and having steps in place to respond accordingly, helps organisations to identify and remediate attacks in a timely way. This can either be the job of a person or set of people on premise or as part of managed service.

Traditionally, in the retail sector, security has been evaluated in terms of "risk" to the organisation and security policies have been put in place to minimise that. What retailers should instead be focusing on is reducing the threats, which are tangible and can be mitigated now; and this is not an insurmountable task. By focusing on the continuous monitoring of systems and adopting an approach which takes into account people, processes, and technology as in the above steps, retailers can start addressing the threats posed to the organisation and crucially reduce the window of opportunity for criminals to take advantage.

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REMITTANCE SERVICES It seems like each new day brings the ‘next big thing’ in payments. One day it’s mobile technology and the next it’s news on leveraging blockchain. The nature of technology ensures that disruption among day to day operations will always occur, and while that is true in many forms of traditional payments, there are some things that aren’t changing as rapidly as others. Even with prevailing trends that point to checks being on the decline, the fact is companies are still collecting and processing a significant number of checkbased payments. For a number of reasons, whether it is the industry in which a business operates, or perhaps demographic or geographic factors, many customers still prefer to pay by check. And as long as this trend continues, businesses need to continue to accept this payment form. In general, companies are processing fewer checks, making economies of scale and efficiencies harder to achieve than ever before. On top of that, there is an ongoing need to upgrade technology (e.g. Check21 and ACH) and what was once considered efficient is often now seen as more of a burden. That’s the kind of scenario – where investment is greater than return – that is causing managers

to wonder if it’s time to outsource the remittance processing function. There are four important trends that many companies should consider when evaluating whether it’s time to consider outsourcing remittance processing:

1. The Cost of Processing is Increasing — While the average face value of a check increased from $1,291 in 2009 to $1,420 in 2012, the actual number of checks written continued on a downward trend during the same time period. Yet check writing still remains an important form of payment for many businesses and individual consumers. In addition to the rise in usage of debit and credit cards, consumers increasingly like the convenience of online bill pay — an option that provides time savings, reduces the hassles of mailing bills and provides an expense save when the cost of postage is considered. Additionally, when businesses factor in the high cost of equipment changeover as technology evolves, it becomes difficult to justify investing more money into an in-house remittance process that has become more complex and more costly as economies of scale shrink. Issue 3





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MIDDLE EAST BUSINESS 2. The Cost of Errors is Increasing— Customer and supplier payments need to be captured and processed accurately so that funds are quickly made available to businesses. Unfortunately, sometimes when things are done quickly, accuracy suffers. In order to run remittance processing well, a number of factors need to be addressed — each and every payment received requires accuracy in processing, encoding and reporting; reporting must be timely; remittance detail and images must be of highest quality; and collection float must be optimized along with other quantitative factors. It can be complicated to get it right each and every time. And due to increased complexity and downstream effects, every error now costs increasingly more money. Processing errors may reduce productivity, delay the availability of funds, or increase unnecessary customer communications and follow-ups. 3. Remittance Capabilities Expansion Opportunities— Unfortunately, with reduced volume, capital investments required to keep-up with new payments instruments often make updating inhouse operations expensive. Consider just a few of the technology updates remittance processors frequently have to deal with: value-added keying, electronic funds transfer (EFT) enrollment, fully encrypted image archiving, single or multi-day decisioning, and intelligent character recognition (ICR). The list is long and often complex. But with an outsourced solution, updates and expanded remit capabilities generally are more viable and more affordable for many businesses. And, if executed correctly, expanded remittance capabilities provide not only greater flexibility, but also offer more value for customers. Finally, with customer payment preferences continuing to evolve, outsourced remittance processing allows for handling of all types of alternate payments. 4. Data Security — With the shift to electronic commerce, migration to online channels, and the increased use of data, large amounts of sensitive information are often transmitted electronically by an increasing number

of companies. As this behavior becomes business as usual, a growing amount of information is at risk of exposure and being compromised, causing a greater number of security breaches. According to a recent survey by Accenture , nearly two-thirds of companies face “significant” cyberattacks on a daily or weekly basis.

For those feeling the pain of that struggle, it may be time to consider options to optimize remittance services.

While the potential loss from cyber-thieves is alarming, the most damaging aspect of a cyber-attack may be the harm to a company’s reputation. While businesses can do everything in their power to make things right, many clients, customers, and partners simply won’t accept apologies when it comes to a breach of their sensitive information. Staying ahead of the curve requires investment and technical expertise – both of which can be time consuming. Looking ahead to the future of remittance, check usage will continue to decline and will likely become less prominent among all payments. But in the near-term, it’s unlikely payments will become completely electronic, yet many companies will struggle to meet the ever-changing requirements necessary of this payment landscape.

Ted Sanchious CTP, Vice President, First Data Remittance Services Issue 3


Asia 120

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RELIES ON MORE DIVERSE TRADE higher-value production. The country’s task, therefore, is to attract investment in advanced industries that will support more varied sources of trade – meaning it must address the reputational and payment risks facing foreign investors and companies.

Alexander Rost Regional Head Indian Subcontinent & ASEAN, Commerzbank

Bangladesh’s economic progress has made impressive leaps forward in recent years, but further development will rely on diversified trade and investment in new industries. Alexander Rost, Regional Head Indian Subcontinent & ASEAN at Commerzbank, explains that banks will be key to smoothing this process, and ensuring that it happens in a sustainable manner. Bangladesh’s economy has advanced considerably in its short history. Last year, it reached ‘lower middle-income’ status ahead of time, while the country boasts a decade-long record of good growth rates – of around 6-7 percent per year – even through the 2008 financial crisis. The main engine of this progress to date has been trade: in particular, driven by exports from the ready-made garment (RMG) sector. Yet to remain on this growth path, Bangladesh needs to move beyond a reliance on textiles into

Key to this is a strong financial sector. Banks, being familiar with the local trading environment, are able to cover these risks for foreign companies and their Bangladeshi partners. In fact, banks have another key role to play: ensuring that trade grows in an environmentally, socially and ethically responsible way.

The need to develop new sources of trade

Looking ahead, Bangladesh faces significant challenges. The economy must support a growing population, and maintain export competitiveness with emerging countries such as Thailand, Vietnam and Cambodia. To do so, and compete on an international level in the long term, Bangladesh must focus on developing its higher-value manufacturing and services sectors. Certainly, Bangladesh’s economic imbalance is stark. Low-value agriculture – employing half the national workforce to produce only around a sixth of national product – lags far behind the services sector, which already generates more than half of GDP. Issue 3



Undoubtedly, Bangladesh’s resilient RMG sector, representing four-fifths of exports, will remain a key strength in trade. But its dominance of the economy is clearly unsustainable in the long term. In fact, with domestic cotton production satisfying only 5% of demand, such a dependency on one industry leaves Bangladesh exposed to volatile prices of the cotton it must import, from India, China and Uzbekistan. A recent Commerzbank report, ‘Insights: Bangladesh’ – which draws together views from leading bankers, and industrial and government experts – illustrates the trade imbalance this creates. While Bangladesh imports advanced technology, chemicals and machinery from Germany (its secondlargest export partner) exports still rely overwhelmingly on textiles. Meanwhile, as Bangladesh’s middle class grows, rising wages will erode export competitiveness, thanks to higher prices – meaning more value-added export sectors will be needed to sustain a consumerdriven economy.

Investing in Bangladesh’s future

Yet the building blocks for higher-value exports are certainly there. High-tech and pharmaceutical industries offer considerable potential for expansion while the shipbuilding industry has also made progress – an encouraging sign for a country known more for its ship-breaking. Indeed, Bangladesh’s large and increasingly better-qualified labour force is well placed to support these new industries. However, Bangladesh lacks the resources to build such new economic sectors alone – meaning it must attract investment in its new industries if it is to compete internationally. Here, a strong financial sector can help. The country’s central bank has played its part: maintaining the stability necessary for attracting all-important foreign direct investment (FDI), while also boasting consistent fiscal surpluses and impressive sovereign credit ratings (S&P/Fitch: BB-; Moody’s: Ba3). With the support of banks, both local and international, Bangladesh can, therefore, prove to investors that it has left behind the conflict and instability that characterised its early years.


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Covering risks to trade

Building on an attractive investment environment – and the support of banks – Bangladesh can expand the scope and value of its trade. Using risk-mitigation instruments such as LCs and payment guarantees, local banks already support trade in raw materials and commodities: indeed, regulation from the central bank on the textile industry requires use of the LC for all deals between suppliers and factories. But banks can also help Bangladesh develop higher-value industries – using export credit agencies to cover the supply of capital goods, for example. Meanwhile, a strong and open financial sector can also help build Bangladesh’s financing track record, which will be key to funding ambitious projects. For instance, Commerzbank has worked with local banks to finance the machinery for power generation, able to confirm long-term letters of credit (LCs) of up to $20-40 million. Building energy security is just one vital step on Bangladesh’s way to improving its infrastructure, and encouraging investment in its future. Thus, supported by its representative office in Dhaka, Commerzbank maintains more than 30 correspondent banking relationships to confirm and advise documentary credits, and facilitate payments across a wide range of industries. Our philosophy has always been to work alongside the local financial industry, leveraging our relative skills and expertise (indeed, last year, Commerzbank organised training seminars for over 400 bankers in Bangladesh).


Bringing sustainability to development

As Bangladesh’s trade grows, sustainability must also accompany economic development. Leading the way, Bangladesh’s central bank has focused support for sustainable and ‘green’ investment in the country. In Commerzbank’s report, Governor Dr Atiur Rahman argues that such an approach is key to supporting Bangladesh’s micro, small and medium-sized enterprises – those companies that drive the economy. Meanwhile, by reducing reputational risk for companies working in the country, the financial sector can enhance Bangladesh’s business appeal abroad. In this respect, Grameen Bank – Bangladesh’s Nobel Prize-winning microfinance provider to the poor – has already led the way in encouraging ethically and socially responsible attitudes in business.

While Bangladesh imports advanced technology, chemicals and machinery from Germany (its second-largest export partner) exports still rely overwhelmingly on textiles.

But commercial banks, too, can work to promote sustainable trade, ensuring that good standards on pay, labour and worker safety are upheld by business partners on the ground. Thus, the reputational risks suffered by companies in the wake of disasters like the 2013 Rana Plaza collapse factory collapse – in which over 1000 workers lost their lives – can be mitigated. Banks will also be essential to facilitate the sustainable growth of Bangladesh’s regional trade. For instance, Commerzbank’s report argues that international banks can support responsible business development in the country by assessing trade against strict sustainability criteria. Doubtless, new and unfamiliar business landscapes present obstacles to foreign companies seeking to trade with an emerging market like Bangladesh. Banks are therefore vital to Bangladesh’s continued development.

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Supporting Enterprise Financing in Vietnam Ms Thai Huong, Vice President and CEO of BAC A BANK shared with us the story behind the banks efforts and success. First, congratulations to BAC A BANK on the Award Best Business Loans & Financing Bank Vietnam 2015, presented by Global Banking & Finance Review. What do you make of that? I am really happy, but not surprised. During more than 20 years of development, BAC A BANK has always been consistent with the mission of investment consultancy for Vietnamese enterprises those are pioneers in applying the advanced technologies in rural and agricultural development. The pathway we have taken, despite difficulties, is sustainable and surely will lead us to success. BAC A BANK in 2011 declared vision up to 2020 as “In 2015, the bank basically completed the standardization of a mediumscaled bank to provide financial consultancy for enterprises supporting sectors, applying advanced technology in agriculture and rural areas. During 2015-2020, the bank will promote these investors to a new level for the international integration”. Looking back into the last five years, I feel so proud of the business successes reflected via achievements of the bank’s biggest clients such as TH true MILK, TH Herbals, FVF (organic vegetables) .They, under the consultancy of BAC A BANK, have already met world-class strict quality standards, claimed various well-known international awards and start expanding distribution channels and opening branches in US and Europe.

Which is the reason behind your decision of making investing in hi-tech agriculture and agricultural development as BAC A BANK’s core strategy? Agriculture plays a crucial role in Vietnamese economy. Nevertheless, the investment into this sector, especially in hi-tech applied agriculture, has not attracted proper attention. There is only 1% of enterprises invest into the industry, most of them are among small and medium business scale. Being considered as low in ROI, a vast number of Vietnamese banks pay less interest in credit for agriculture. Statistics show that Outstanding loan for agriculture gains only under 10% of Total Outstanding loan balance. The segment’s credit growth is counted around 9.89%, equivalent to 50% of the overall market. Under this context, BAC A BANK sees numerous opportunities in business. Taking critical thinking and professionalism as keys to success, the bank determinedly consults its clients to invest in agriculture, bringing technologies and knowledge to get surplus values in production. Up to recent, BAC A BANK has one of the biggest agriculture financing portions in Viet Nam with more than 70% of the total debit balance. The different pathway that we make obviously helps BAC A BANK stay firm during the economic turbulences and particularly lessen the negative impacts by the fluctuant markets of real estates and securities during 2011 – 2013. Issue 3



Looking back into the last five years, I feel so proud of the business successes reflected via achievements of the bank’s biggest clients such as TH true MILK, TH Herbals, FVF (organic vegetables).

In BAC A BANK, we not only supports our clients in finance but also helps the management bodies to find out the “golden key” for the restructure of national agriculture and economy. The hi-tech agriculture projects consulted by BAC A BANK have become good examples for Vietnamese policy-makers in governing the economy. What is your comment in the differentiation of BAC A BANK investment model, which now could be considered as the success of your business? In BAC A BANK, the professional model of investment consultancy and credit is taken very seriously. At first, we exam and make customers segmentation to provide financial services. Instead of aiming at the hot growing industries like securities or real estates, we look into special group of clients to provide credits, focusing in agriculture, education and healthcare. In next step, BAC A BANK carefully sets up a list of comprehensive requirements for establishing the investment consultancy of each project, stress on the sustainable development and social impacts. Besides credits, BAC A BANK also takes the proactive role in preparing and monitoring the business plan as well as the actual execution of projects such as product strategy, distribution channels, and marketing activities. So far, successful projects consulted by BAC A BANK could be count in TH true MILK, organic vegetables FVF, fresh herbs TH Herbals, international education TH School or Wood Processing plant and sustainable afforestation MDF… These projects advance in manpower, technology, and quality control and have great contribution in sustainable development and public interests

Ms Thai Huong Vice President and CEO of BAC A BANK

Ms Thai Huong is the Vice President and CEO of locally-owned BAC A BANK. Founded in 1994, BAC A BANK has established an admirable reputation through the provision of loans for hi-tech agricultural projects, with total asset nearly USD 3 billions. Ms Thai Huong is also the Founder and President of TH Group – the enterprise behind radiant emerging of fresh milk production in Vietnam recently. After 6 years, TH Group helps increasing the percentage of fresh milk among liquid milk market from 5% up to 30%. With her numerous crucial contributions to Vietnamese economy, focusing in dairy industry, Thai Huong is named Asia’s Top 50 Most Powerful Businesswomen in 2015 by Forbes

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Lucky Since its start in 2009, FBS has been committed to providing quality services to Forex customers. FBS turned 7 in February. Editor Wanda Rich spoke with Kira Iukhtenko, deputy head of the analytical department at FBS about their operations and the current forex environment. Congratulations on hitting the Lucky 7! At the end of your first year in operation, FBS had 50,000 customers. What do you attribute to your success and growth? FBS can attribute its success to the endless innovations for client satisfaction. FBS employs the most advanced technologies available to the industry and offers its growing client base a host of services tailored to meet the demands of even the most sophisticated investors. FBS continuously invests both human and financial resources into further developing its range of products and services in order to keep pace with the latest developments and market dynamics. We aim to provide our clients with the most comfortable, safe and interesting trading environment. FBS traders utilize the MetaTrader 4 platform which is extremely secure, reliable and comfortable to use. 128

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We also provide our traders with promotional advantages. One of the features that most inspire the clients’ trust is the maintenance of a rock-solid deposit insurance program – unique in the industry – that allows traders to shield their holdings from losses. In an unforeseen situation on the market a client may receive part or entire compensation for their investment. Indeed, FBS turned 7 years old in February of 2016, as always, we provided our clients with an entertaining promotion where the top 4 winners were gifted high tech MSI Laptops. Right before the company’s birthday, FBS also reached 1,000,000 traders. This was very exciting and such a wonderful milestone to reach! FBS made the millionth traders dream a reality and bought her a motorcycle!

Kira Iukhtenko Deputy Head of Analytical Department. FBS, Inc.


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To touch up on a few other FBS privileges – we have the 100% Deposit Bonus which gives traders an opportunity to double their deposit; Self-Rebate Service where traders receive a part of the spread from their trades and several contests for both traders and partners. FBS has a huge, prestigious Introducing Broker Program with endless opportunities and advantages and a VIP program for traders and IB’s. What do you see to be the major world events for 2016 that will affect the forex market? The Forex market is very sensitive to economic and political developments. Among important events, I would name the UK referendum on its membership in the European Union. It’s quite clear that the consequences of Brexit will be immensely negative for both Britain and the euro area. The British pound has already felt selling 130

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pressure. More periods that are negative for the sterling are likely ahead of the vote on June 23. For the US dollar, much will depend on the American presidential election scheduled on November 8 as after that the course of the American policy may change. In addition, commodity currencies will be influenced by the oil price dynamics, so the two regular OPEC meetings, first one being in June, will also matter. What is the potential of the currency market this year? What trends do you foresee taking place? Forex trends form under the impact of the central bank’s policy, so every month traders have to pay attention to the regulators’ meetings. As the advanced economies continue being in the situation

of low inflation, none of them will want to let their national currency strengthen much. As a result, we can assume that trading in major pairs will be within broad, but sideways ranges. How will the market react to the next rate hike from the US Federal Reserve? The process of raising rates is very difficult for the economy. The position of the US Federal Reserve is especially hard because it is the only central bank, which tries to tighten policy. The Fed’s first attempts to increase rates in December 2015 provoked disruption on the financial markets and generated concerns about the global economic prospects. The European Central Bank and the Bank of Japan are deep into the opposite kind of policy – monetary easing. However, as the loose monetary policy is becoming less and less effective,


Right before the company’s birthday, FBS also reached 1,000,000 traders. This was very exciting and such a wonderful milestone to reach! FBS made the millionth traders dream a reality and bought her a motorcycle!

investors worry about the future more and more. As a result, in such an environment there are no guarantees that there won’t be another outbreak of volatility when the Fed hikes for the second time.

ECN Account with ultimately beneficial trading conditions for advanced traders. FBS also provides Demo accounts (of each account type) without time restrictions.

How easy is it for new traders to get started with FBS and what resource do you have available to them to help them achieve success? A large amount of traders join FBS on a daily basis. We have 5 different account types, to suit every type of trader. Starting from Cent Account, which is best suited for beginner traders; Micro Account with a fixed spread for trading on inferior deposits;

A very popular and fairly new option at FBS at this time is the “No Deposit $123 bonus” account where clients are able to start trading without prior investment. FBS Website is available in 12 languages and will expand to more languages in the near future.

Zero Spread account with 0 spread on all currency pairs; Standard Account with classic trading conditions and Unlimited

We provide a large variety of comfortable deposit/withdrawal options customized for each region, and the Financial Department operates 24 hours a day 5 days a week for the fastest financial operations. FBS customers are our priority.

Our Customer Support receives clients 24 hours a day 5 days a week and is available in English, Russian, Bahasa Indonesia, Bahasa Malaysia, Thai, Arabic, French, Urdu, Bengali, Hindi, Chinese, Japanese, Vietnamese, Spanish and Polish. Issue 3





Doing more with less is an important goal for any business. In the world of banking, an increasingly complex market is driving firms to uncover new ways to deliver cost efficiencies, writes Peter Gould, Associate Partner at Orbium. Growing competition from specialist providers continues to disrupt the traditional banking model. These firms are using new technology and an agile workforce to build niche products without the overheads. More established firms with a broader offering must update legacy technology to compete. In addition, the growing burden of regulatory compliance and burgeoning data volumes add to the cost pressures. All this means that banks are having a fundamental rethink of how they streamline costs – including exploring new opportunities in their technology. One area where they are making savings is in the testing of core banking platforms.

Testing is an essential task when implementing, upgrading or enhancing a platform. The problem was that, typically, it involved many labour-intensive and costly elements – but that has started to change. There are three principle ways to lower testing costs – reduce the amount of labour through automation, reduce the cost of the labour through off-shoring, or free up resources entirely through outsourcing.

Accessing greater automation Manual processes increase costs and also slow down the testing process – in turn slowing down the overall platform implementation or upgrade.

Automation is clearly more efficient, but the automated testing tools available historically were too generic. More often than not, they required a considerable amount of configuration to suit whichever platform the bank had chosen.

The emergence of testing software designed specifically for individual core banking platforms has opened up the possibility of greater automation to many more banks. Increasing complexity and system sizes mean that automation is more than justified – whilst there is still a small amount of upfront configuration, banks can achieve a greater return on investment.

Crucially, these automated testing tools come with a library of predefined, ready-to-use test cases, which can be used and reused across multiple, similar testing environments – avoiding duplication of resources. Issue 3



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The rise of off-shoring

Onshore resources can also be a big expense. Off-shoring is a known option for reducing the cost of labour but data security is a major concern. For adequate testing, banks need to use realistic data sets. They have to test as many scenarios as possible and that means using data to accurately represent a maximum number of situations. Real data is the most reliable but banks are understandably nervous when sensitive customer details move outside their own walls. In some cases, regulations restrict what they do with data and mean they cannot send it outside national jurisdictions. This is an obvious problem for offshoring but there are two ways banks are overcoming the hurdle – through synthetic and anonymised data. Synthetic data is entirely made up with the objective to be as realistic as possible while anonymised data changes the sensitive details in the original information. Both approaches combine realistic data with lower risks of confidential information leaking if the data is intercepted. Another challenge is that, while off-shoring reduces labour costs, there is a danger that high turnover of specialist staff can negate the benefits. There is usually a higher risk of this when off-shore centres have simply extended their existing development teams to cover testing. That’s because they don’t always have the techniques and career development in place to retain the testing experts. However, centres designed from the ground up with core banking testing in mind can be sure to embed training and clear career paths from the outset.

Time to outsource

A third option for reducing costs is to outsource testing to a third party. While banks can never hand over the actual responsibility, they can hand over the bulk of time-intensive work. Banks using this option will often go down the Business Process Outsourcing (BPO) route, where they shape their own processes to fit an off-the-shelf core banking platform. This means they can outsource to a third party that specialises in their platform and, therefore, has tried and tested processes already in place.

The outsourced centre can pool test cases across multiple banks using the same platform – and the banks benefit from the resulting efficiencies.

A combined approach

On their own, each approach can make a big difference – for example, a bank may simply introduce more automation. However, perhaps the real gains are made when banks start to combine the three options to suit their own setup. Some will opt to off-shore but not outsource, so they set up a testing centre with their own employees. Others will choose to outsource the whole process but keep it onshore and avoid potential data security issues. Whichever they prefer, the end goal is the same – reduce costs. What’s clear is that competition will continue to increase and new regulations will inevitably arrive. Forward thinking banks have chosen to confront the challenge head on and others will need to follow. With the arrival of more options for testing, banks of all sizes have a growing armoury at their disposal in the race to stay ahead.

Peter Gould Associate Partner at Orbium. Issue 3



COMMERCIAL AVIATION INVESTMENTS Following a tumultuous period marred by high oil prices, global financial crisis and increasing market competition, investor confidence in the commercial aviation industry has, in recent months, begun to rebound.


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Since the summer of 2008, the health of the industry has at times looked bleak: during this period, crude oil reached just shy of $150 a barrel, airlines faced the beginning of a global lending squeeze and increasing competition hit profits. Aircraft production was also down, with the delivery of many new aircraft being deferred, while passenger growth numbers did not meet expectation. Nearly eight years later, and those market headwinds are finally abating. The rise of the middle classes in developing countries, coupled with wider global economic expansion, is driving renewed demand for commercial aviation. The increased market competition of the noughties has ultimately forced airlines to optimize and become more efficient. What’s more, monetary easing is stimulating lending, and banks not only have more capital to lend, but are lending to larger, more secure organisations - including airlines.   Meanwhile crude oil - which typically accounts for 35-50% of an airline’s costs is languishing at around $30 a barrel. With the majority of the industry yet to pass these reductions onto consumers, the airlines are generating higher profits and set for a golden period of booming growth.   As we are seeing this year, this growth is already translating into ambitious new fleet acquisition projects. In just the past few weeks, Iran has signed a $25b deal to purchase 118 aircraft from Airbus, while Flynas, Vietjet and United Airlines have all also proposed or placed orders for new fleets of aircraft. At the 2016 edition of the 138

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annual Bahrain Airshow, orders reached $9b - triple the 2014 figure. Investors forecasting aviation industry developments in 2016-17 are therefore understandably bullish. But barriers to industry growth remain – most notably a shortage of qualified commercial pilots. No longer are the greatest hurdles facing the commercial aviation sector global economic insecurity, oil prices or terrorism; rather, it is lack of aviators, with Boeing assessing that by 2034 558,000 additional commercial pilots will be required worldwide to service expanding fleets.   Whilst these alarming figures have awoken the industry to the scale of the problem, current pilot training infrastructure is unable to match this demand. This is why, in this current climate, private pilot training academies offer high-potential investment and acquisition opportunities for the coming decade and beyond.   The nature of the pilot training industry means that the strongest investment and acquisition opportunities will be most

prevalent with the established training providers. The training organisations with a clear brand, proven track record and strong relationships with airlines offer the most security. Start-ups on the other hand have a challenging time penetrating the market, and the risk/return ratio is unlikely to offer an attractive investment opportunity – especially as national aviation regulators are increasingly enforcing more stringent training and safety standards on pilot training academies. Investors should also do their due diligence into the different types of training academy, and what opportunities they may hold. Those academies that offer fully incorporated, end-to-end pilot training solutions (as opposed to solely flight training) arguably offer the most attractive investment opportunity, as airlines can outsource their entire pilot training requirements to these facilities. Those pilot training facilities that offer a range of flexible and bespoke training solutions, such as the Multi-Crew Pilots Licence, will also hold an advantage as they can address different airline and regulatory requirements.


Geographically, the strongest growth within the industry will be seen across the Asia-Pacific region, where almost half of the world’s growth in air traffic will be located. By 2030 three billion people will have entered the middle classes – much of that across the Asia-Pacific region – with budget carriers servicing the new budgetwary middle class. Pilot training academies supplying the budget Asian carriers with their pilots may therefore offer some of the best returns on investment.   Aircraft and simulator manufacturers, including Airbus and Boeing, as well as other industry players, are also expanding

into the pilot training market. A recent example of this was the purchase of CTC Aviation by space communications system L3 for $220m. It will be the established training providers, with their experience and flexibility, who will capitalise upon these new growth opportunities within the market. In the next 3-5 years there will be significant growth both in the number of training academies and the expansion of existing academies. Despite oil prices being predicted to stay low for a number of years and challenging economic conditions relenting, the commercial aviation sector still faces the risk of stunted growth and unfulfilled potential. Investment in the pilot training academy market during this period will not only help ensure the aviation industry is furnished with the pilots it needs, but offers the prospect of strong growth and returns on investment.

Maximilian Buerger Manager Alpha Aviation Group

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Why Data is Key in the Age of Customer Obsession Graham Lloyd, Industry Principal of Financial Services at Pegasystems asks whether those in the financial services industry know their customers as well as they think Ever get the slightly unnerving feeling that sometimes the technology you use knows you better than you know yourself? It sounds strange, but how many times have you opened a web browser to buy something very specific from, let’s say, 140

Issue 3, only to reach the virtual checkout with two or three extra items that the website has suggested you might like? Alternatively, how often have you settled down to watch your favourite programme on Netflix, only to be side-tracked into watching something completely different that the content provider has suggested you watch instead? The truth is that, as consumers in a new, digital age, our behaviours and expectations have changed, and that today, we now expect organisations to be able to understand our needs and predict what will

appeal to us. One of the main reasons for this is that the way organisations interact with us is undergoing a fundamental shift, meaning that they can now use information from the devices we all use to gather information about us and profile our likes, tastes and behaviour much more easily. The upshot of this is that it’s no longer enough, it seems, for businesses to be able to offer their customers what they want; the real value, it seems, lies in offering customers what they don’t yet know they want!


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In short, this data is allowing many organisations to become customer obsessed, and an increasing number are reaping the dividends as a result.

The key to this lies not, as you may think, in some ancient mind-reading technique, but in the increased use of connected devices, such as smart phones, smart watches, connected cars and other ‘Internet of Things’ enabled technology. These devices all provide enough data to enable businesses of all shapes and sizes to analyse and understand their customers, their behaviours and their preferences – and even to predict what they might like. In short, this data is allowing many organisations to become customer obsessed, and an increasing number are

reaping the dividends as a result. For financial services organisations in particular, this has the potential to prove problematic. Let’s be clear: consumers of banks, insurance providers and others in the financial industry have exactly the same expectations as those of on-demand television and online retailing. If past customer behaviour tells us anything, it’s that if they see that one provider offers them a new, innovative service that they like, they can be fickle when it comes to changing their provider. So as an industry that, by its own admission, can sometimes have difficulty keeping up when it comes to

technological innovation, how well prepared are financial services organisations to be able to offer these services? The answer is that while many are better prepared than you might think, many are still struggling to embrace the new age of customer obsession. In a recent global survey conducted across 56 different countries by Pegasystems and Cognizant amongst 500 senior executives in the financial services and insurance industries, it was clear that there’s a huge appetite for being able to offer customers personalised services. Issue 3




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For example, 68 per cent of respondents said that they expected to be able to use data from wearable devices to offer personalised services to customers within five years, while 59 per cent said that they expected to be able to use the data from connected cars to achieve the same goal, within the same period. However, despite this almost a quarter (24 per cent) of all global financial services executives surveyed said that they currently had no plans to offer their customers full personalisation. The reason? Put simply, the legacy infrastructure they currently have in place is unable to cope with the demands of the changing technological landscape, and they are either unable or unwilling to invest in systems that can. 79 per cent of those who said that they had no plans to provide personalised services said that the lack of a single customer view was an obstacle to achieving this goal, while 85 per cent cited the difficulty of using legacy systems to process very large data sets as a barrier. Significantly, the biggest obstacle to personalisation given was the lack of availability of sufficiently rich customer data, with 88 per cent suggesting that their existing systems are unable to connect to data flows from newer, connected devices.

What this means is that although both customer demand and trends in industry as a whole point towards being able to gather customer data to offer personalised services, there are still a significant number of organisations who are stuck using tools that are no longer fit for purpose. Let’s face it, using traditional customer segmentation tools that are, in some cases, more than ten years old, to manage complex data flows and offer a single view of customers that can allow you to understand and even predict their behaviour, simply isn’t possible. It’s like asking a caveman with a piece of flint to replicate the beauty of Michelangelo’s work in the Sistine Chapel. Data, and its ability to shape personalised experiences has become an integral part of the way the modern organisation operates. By interpreting information from a range of devices, organisations in the financial services sector take a bold step forward into the future of not only customer engagement, but also business as a whole. Customer obsession is integral to this, and it’s becoming clear that the key to understanding your customer completely is through understanding their data. Isn’t it worth asking yourself whether or not you are going to embrace the age of customer obsession, or get left behind as your competitors take the plunge?

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Graham Lloyd Industry Principal of Financial Services at Pegasystems

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FUTURE OF ACCESS The financial services industry has always been one of the most proactive when it comes to cyber security. But security teams often have a tough time finding ways to increase security without creating a lot of resistance from either employees or customers. You can explain how clever, well-funded and persistent the bad guys are, but people quickly forget and fall back into old bad habits. Most employees don’t think about security as their priority, especially when there are calls to make, or services to deliver, whilst customers just want to access their accounts as quickly as possible. A traditional security strategy encourages multiple layers of security – since adding additional security checks forces attackers to defeat multiple systems in order to break in and do their mischief. Defeating multiple systems is not impossible, just harder – so the odds are in the favour of the organisation when you have multiple layers. However, this line of “more is better” thinking can get quickly out of hand, especially if those additional security precautions rely on your users to participate in the active defence. For example, using “strong” passwords that include letters, numbers and special characters is good, and it’s something pretty much all banks already require from users, but making those

password 10 characters long is probably more than a typical user can remember. Then ask them to change their password monthly, and you will start to see creative memory aids appear – typically in the form of yellow sticky notes. Now add an additional layer of security: give employees a hardware token for their keychain that generates a one-time use pin code and give customers a personal card reader to use for pin generation when logging in online. While this is a very effective second factor technique, it relies on the individual having it with them and not losing it. By doing this the banks overall access security has improved, but so has the burden on the employees and customers. As a business the last thing you want is a negative user experience or reluctance to use the security services in place which could jeopardise the business. The key is to use multiple layers of adaptive authentication, but where possible make it authentication that doesn’t require users to do anymore work whilst still providing a high level of security. There’s already a number of security methods which financial services organisations have started to implement to address these challenges as part of a multi-layered adaptive authentication approach: Issue 3



Behavioural biometrics, on the other hand, is becoming an important and integral new part of authentication which financial services teams need to be considering

Physical location

Most have experienced having a card blocked when using it overseas. It’s possible to do the same thing for employees trying to access the system or customers accessing accounts, by storing information about the physical location of a previous login, and comparing that to subsequent attempts. Do your users move around, sure they do! So if the login location changes, it’s possible to do a quick check of the time delay and distance between logins, which can determine if that change in location is an improbable travel event.

IP address

Similarly, it’s possible to check the IP address that the user is logging in from, and decline anyone coming from a known bad IP (botnet, Tor network, black listed IP, etc.). It’s also effective as part of a multi-factor authentication process to register the endpoint device individuals are logging in from, so that the device can be recognised on subsequent logins.


Craig Lund CEO SecureAuth 146

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Biometric authentication is something many financial services organisations are already adopting for a second factor of access, but despite its uniqueness even this is not fool proof, with security testers replicating finger print scans in a matter of minutes. Behavioural biometrics, on the other hand, is becoming an important and integral new part of authentication which financial services teams need to be considering – precisely because it involves

user behaviour that is almost impossible for an attacker to duplicate and is pretty much invisible to the employee or customer logging in. By collecting information about how a user interacts with a device type, including keystroke and curser movement, it creates a unique behavioural biometric user template on each device and it can be used to verify the identity of the user without the users having to do anything other than input their username and password. When dealing with a possible cyber-attack and a suspicious individual tries to login, having a multi-layered approach using techniques such as these, means that as an organisation you can make real-time decisions to allow the login, to step-up the login by requiring a one-time pin code, or to decline the request all together. This way users doing routine work activities are not asked to verify their identity, whereas high-risk behaviours are challenged to provide a second factor. End users, whether they are your customers or your employees, do want to do the right thing when it comes to security. Implementing a multi-layered authentication approach will, in part, help them do this. But you also need to make it easier by adapting and selecting access capabilities to fit their needs. Then you won’t have to rely on the good behaviour of customers and employees to protect the security of the organisation and they will love you for it.

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Global Banking & Finance Review - Business and Financial Magazine  

Global Banking & Finance Review is a leading financial portal and Print Magazine offering News, Analysis, Opinion, Reviews, Interviews & Vid...

Global Banking & Finance Review - Business and Financial Magazine  

Global Banking & Finance Review is a leading financial portal and Print Magazine offering News, Analysis, Opinion, Reviews, Interviews & Vid...