International Finance Magazine Oct - Dec 2016 Banking & Payment Systems by International Finance

www.internationalfinancemagazine.com

October - December 2016

Volume III Issue 1

UK £4 | Europe €5.35 | USA $6

ANNIVERSARY ISSUE

‘now we have to deliver even

pg.22

MORE Than expected’ Interview with Cezary Kocik, Head of Retail Banking, mBank

pg.74

Opinion The implications of Brexit on London

pg.86

Investment Banking US banks are gaining an edge

pg.108

Opinion Ways to tap Iran’s potential

Note FROM EDITOR

he most reliable suggestion for change usually comes from customers. Unfortunately, not all banks take their suggestions as seriously as they should. BRE Bank in Poland did and made way for mBank. The irony is that BRE Bank had launched mBank in 2000 as an internet-only bank. BRE Bank accepted and embraced the changing preference of customers for mobile and internet banking. We spoke to Cezary Kocik, a member of the management board of mBank, about this transformation. Read the interview in our special section on Banking and Payment Systems. Speaking of new things, Britain is fast recovering from the outcome of the Brexit vote. From all available parameters, it appears that the nation has absorbed the shock of the unexpected result and is bracing for the changes that are inevitable. Our team tried to catch the mood in the UK in a series of articles around Brexit. While EU grapples with Brexit, US investment banks are slowly edging

out their European counterparts from the global stage. The problem is that individual nations are not large enough to support a global investment bank while the EU is not cohesive enough to agree on supporting one among the large European banks due to potential differences over where it will be based and other issues. That will leave the world at the whims of US banks. A look at Iran could give you an idea of the emerging scenario. The Middle East nation is trying to integrate into the global economy after decades of sanctions, but is stymied by the Americans. US banks refuse to touch any dollar or money that has any kind of Iranian connection, essentially deterring any government or company from investing in Iran. Even otherwise, investors are finding it tough to get even their toe inside the door due to the challenges of local business practices and laws. These challenges make it imperative for you to read our article on how investors can tap the potential in Iran. As always, we seek your opinion on the stories we have featured in this issue and suggestions on the stories you want us to cover.

Dhiraj Shetty Editor editor@ifinancemag.com

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

For advertisements, contact Adam Lobo Phone: +44 (0) 207 193 9451 | Email: alobo@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS

‘Now, we have to deliver even more than expected’

P18-37

BANKING & PAYMENT SYSTEMS

Nigel Davies

Defending the UK’s financial trading sector

Rejigging banking to fit your pocket

Testing time for DBS Bank

Scott Dawson

34 48 52

Is there a future for high street banks? Entersekt: Ahead of the game Brexit: Banking in the dark Brexit: To stay or relocate?

International Finance Magazine Oct - Dec 2016

06 70 74 82

BYTE BY BYTE Your company’s been hacked: so is it sayonara CEO?

Adrian Bell

The reality after the Brexit vote

Dr Peter Hahn

The implications of Brexit on London

Brexit interview ‘Strengthen Italy’s Atlante’

INDEX October - December 2016

Volume III Issue 1

pg.100

pg.128

Iran: Matching expectations with reality

Dirk Schoenmaker & Charles Goodhart

US banks are gaining an edge

104 Hurdles for Iran Azadeh Meskarian

Ali Mirmohammad

to tap 108 Ways Iran’s potential

112

Kenya’s oil fortune in limbo

116

Bahrain leads in E-Government in Middle East

making branding budgets work

120

Egypt: Faltering economy stirs labour discontent

124

Coming up with ways to insure renewables

132

Rob Brown

Develop a standout reputation for what you do OUT OF OFFICE

Yoni Assia ‘I started trading stocks at 13’ pg.138

Oct - Dec 2016 International Finance Magazine

byte by byte

Your company’s been hacked:

so is it sayonara CEO? Experts warn that most companies lack a credible reaction plan. And if chaos does ensue, the CEO may well take the blame Tim Ring

ith 90% of large UK companies suffering a security breach in 2015 (PwC), it’s now a case of ‘when not if’ your organisation will be successfully cyber-attacked. And the fallout can be spectacular, up to and including the CEO losing their job. Take Gregg Steinhafel, chairman and CEO of giant American discount retailer Target – slogan ‘Expect More. Pay Less’ – who famously resigned in 2014 after a massive data breach exposed the credit card or personal details of up to 110 million customers. Or, Noel Biderman, CEO of infidelity dating website Ashley Madison – slogan ‘Life is short. Have an affair’ – who quit last year after thousands of secret subscriber details were leaked over the internet. Or, Dido Harding, CEO of

International Finance Magazine Oct - Dec 2016

telecom provider Talk Talk, who with other board members recently saw her annual bonus halved after a costly cyber-attack. Yet, despite these and other highprofile casualties (C-suiters like the chief

byte by byte

information or security officer are clearly at risk), the respected Ponemon Institute warns that barely one-third of global organisations feel they have an effective ‘cyber-incident’ response plan in place. “Major gaps remain in how they are comprehensively preparing for a data breach,” it says. First 24 hours critical So what can you do to avoid carrying the can for failing to deal with a cyber-attack properly? A new report from AT&T, The CEO’s Guide to Cyberbreach Response, stresses that an immediate response is vital. “The first 24 hours are critical to contain the breach and limit its impact,” it says. “Let’s be clear: Incident response can make or break your business. Some companies have tallied losses in the tens and even hundreds of millions of dollars after suffering severe breaches. In those

cases, the CEO, CIO or other executives may ultimately take the fall.” This echoes advice from the likes of Experian and Absolute Software, whose guidance boils down to two essentials: first make sure you have a fully tested response plan, which defines all breach scenarios and preventive measures, and execute it quickly; then communicate with staff, customers, partners, regulators, law enforcement and the media about the breach and what you are doing to repair the damage. Failure to do this can have severe consequences, as happened at Ashley Madison, which discovered last July that it had been breached by a hacker gang called The Impact Team. But AM did not follow the AT&T response playbook. First it denied reports that customer records had been released, only to admit a month later that over 60 gigabytes of highly sensitive

personal data had been leaked online. But worse than the technical failings was the communication pushed out by Ashley Madison’s parent company, Avid Life Media. The month after news of the hack broke, ALM issued statements insisting “We will not sit idly by and allow these thieves to force their personal ideology on citizens around the world”, but offering no direct apology or offer of help to users. This led to a damning attack on August 24 by security guru Troy Hunt, who was helping AM users find out whether their identities had been exposed: “This is one of the things that struck me most about the entire incident – the very poor communication from Avid Life,” Hunt blogged. “There has been no direct communication with members that I’m aware of, no notification on www. ashleymadison.com. The

They (CEOs) should ask themselves why they didn’t do more to stop it in the first place Fraser Kyne, director, Bromium

Oct - Dec 2016 International Finance Magazine

byte by byte

Gregg Steinhafel resigned as chairman and CEO of American discount retailer Target following a data breach in December 2013.

way they’ve handled this incident has been appalling – it’s as if they’ve just stuck their fingers in their ears and sung ‘lalalalalala’. By now, we should have seen at least something to try and assist those who are having their lives torn apart by this. Instead there’s nothing. Nada.” Four days after this broadside, Ashley Madison

CEO Noel Biderman decided to step down. A different response The contrast with Target is striking. Its response to a breach confirmed on Sunday December 15, 2013 was seemingly exemplary: by 6 pm that evening, Target had closed the access points where the hackers had infiltrated its network

and eliminated the rogue malware from its sales registers. The following month, CEO Gregg Steinhafel went on TV and in a heartfelt interview told US CNBC business news anchor – and concerned Target customer – Becky Quick that when he heard of the hack: “My heart sunk. I was devastated. Since that conformation,

One of the biggest challenges CEOs, CSOs and CISOs face is getting budgets for security projects Stephen Gates, chief research intelligence analyst, NSFOCUS

International Finance Magazine Oct - Dec 2016

byte by byte

According to the Ponemon Institute, barely one-third of global organisations feel they have an effective ‘cyber-incident’ response plan in place this team has worked seven by 24, round the clock – Christmas Day, you name it, everybody has been all in.” Steinhafel described how within four days of discovering the hack, Target had launched its forensic investigation (helped by the US secret service), and notified its near 1,800

stores and call centres, then customers. “Our number one priority was, do the right thing for the guests (customers),” he said. “We worked around the clock to try and do the right thing, to be transparent, truthful and then to share what we knew as quickly as we could.” But of course, Steinhafel

still ended up resigning. Why? Target ’s forensic investigators made mistakes. First they said 40 million customers accounts were affected (bad enough) but no PIN code details had been compromised. But digging deeper, they were forced to backtrack and admit pin numbers

were accessible, and that a further 70 million customers’ personal details had been exposed. It was too much for Steinhafel who resigned some months later, while staying on the Target board as an advisor. IFM editor@ifinancemag.com

Lessons for others

o what lessons can other companies learn? Security expert Stephen Gates, chief research intelligence analyst at NSFOCUS, confirms AT&T’s view that a fast breach response is vital. He told us: “The first 24 hours are critical. Since attackers often leave a trail of their activity, if that trail is lost, then gaining intelligence into the attack, the cause of the breach, and what possibly was stolen may be lost.” Data logs from the suspected time of the breach, configurations of security appliances and data backups are vital to help forensics experts piece together the attack, he said. But if there is a post-mortem, business leaders should also cover themselves against accusations that they did not do enough to prevent the hack, Gates says.

“One of the biggest challenges CEOs, CSOs and CISOs face is getting budgets for security projects. Often, these key stakeholders know what steps should be taken to improve cyber security; however, they may not be able to get funding for their recommendations. Regardless, they need to document their recommendations, and what may happen if they are not followed. This due diligence may help key stakeholders avoid losing their jobs or getting their pay docked.” Fraser Kyne, a director at security firm Bromium, is adamant that CEOs should focus squarely on doing the right thing to prevent their company being hacked. Never mind after the event, he says: “They should ask themselves why they didn’t do more to stop it in the first place. Often, after-the-

fact analysis is akin to waking a patient on their death bed just to tell them why they are dying. We have to do better than that. “Of course the IT security industry wants you to believe that you can’t stop attacks. But this has more to do with them selling you tools to analyse the symptoms of an attack, than it has to do with a concerted effort to do a better job of stopping attacks in the first place.” As Target’s tale suggests, it may not be enough for a CEO and Board to make every effort to do the right thing after a breach. Kyne says: “If the CEO does not empower the CISO to investigate all possible means to STOP threats and not just SPOT threats after the fact, then they have to accept that no matter what they do to respond, the writing may already be on the wall.”

Oct - Dec 2016 International Finance Magazine

OPINION

Chris Barrington

Investing in the most effective information

security technology available â&#x20AC;&#x201C; 10

your employees People are as likely to cause a breach as viruses and other types of malicious software

International Finance Magazine Oct - Dec 2016

OPINION

year ago, the Information Commissioner’s Office (ICO) in the United Kingdom carried out 585 investigations into reported breaches of the Data Protection Act within the financial services industry. Almost triple the number of probes made in 2014. One of the key culprits is that as banks continue to increase their use of technology to let people work remotely or to communicate via mobile devices, they increase the risk of someone making a mistake in how they handle sensitive data. Despite the increase in staff awareness training, people are as likely

to cause a breach as viruses and other types of malicious software. Yet, employees are capable of being turned into a company’s strongest line of defence. What few financial organisations recognise is that Information Security and convenience appear to be inversely related. The greater the security provided by a control, the less convenient it is for affected individuals. In fact, organisations’ willingness to tolerate inconvenience has a profound effect on the security of its information. Even sophisticated technology companies are not immune as their youthful cultures tend to resist

information technology restrictions. The key issue is that despite the importance of the subject, many employees perceive Information Security as onerous. And if Information Security is introduced in an overly directive manner, it is likely to be counter-productive, heightening rather than reducing organisational risk. As a consequence, shifting cyber security from prescriptive and dull to engaging is vital, and it hinges on employee communication. This is not, however, a simple matter of improving ‘internal marketing’ or an annual refresher of the compliance training module.

Turning employees here are into a staunch line of defence requires a number of strategic approaches of the best

Resonating

Shifting perception around Information Security means ensuring your message is heard, understood and easily adopted and adapted by those you want to reach. Employees need to be receptive to your message. So it’s really important to engage on their terms, not just yours. Work out what will resonate for each segment of your audience.

Connecting

To engage requires making both a rational and an emotional connection to guide employees along the “message received > understood > acted upon” continuum. This means carefully defining the tone and nature of any communication, having a clear, informed understanding of the pervading culture and the personal and contextual nature of Information Security in employees’ day-to-day lives.

Oct - Dec 2016 International Finance Magazine

OPINION

Simplifying

If it appears complex, busy employees won’t want to engage with your message. Simplifying takes effort, determination and often ingenuity but it’s always worth it. Try taking a higher level view, away from the dense undergrowth of policy and procedure.

Action-oriented

To be transformational, this approach needs to have defined outcomes, such as a response or a reaction of some kind. Ultimately, this has to affect not only what employees think and feel, but critically what they actually do. It has to ‘help make change happen’. This is not about plastering a set of imperatives or instructions, just the clear articulation of how employees can do the right thing.

Messaging

Employees need to understand the risk, their role and the actions they should take. Consider two broad types of communication: Generic communication that sets the essential context and focus broadly on “how to think” about information security; and issuespecific communication that focuses on “what to do” about defined risks and aspects of security, such as working offsite, phishing e-mails and information classification.

Integrating

Every organisation has its own mix of cultural norms, a set of established ways that people operate every day, and that includes how communication works. Therefore, any strategic planning must always be bespoke and tailored. There is no silver bullet or magic answer. Cut and paste will not work. Careful, informed thinking is needed to integrate the right cyber-security thinking and practices.

Space invaders

Of course, knowing about cultural norms and communication channels doesn’t have to mean more of the same. In fact, looking for ways to allow your activities and communica-tions to be engaging might mean challenging these norms. Think about trying to ‘invade the spaces’ that exist both literally, in the business environ-ment, and conceptually, in the gaps in how we think and behave.

Ongoing

Successful campaigns are those that recognise that influencing behaviour around a difficult subject is an ongoing challenge. Threats, systems and people change. Information Security needs to be business as usual, and all employees need to be reminded and updated about things – most especially on their pivotal role in doing the right thing.

International Finance Magazine Oct - Dec 2016

Be distinctive

Information Security is just one of many topics competing for employee’s attention and the noise level is often deafening. Not only does your communication need to stand out, it needs to stick. And stay stuck. An effective creative platform should have the creative and intellectual glue to help ensure your communications are distinctive, coherent, compelling and effective.

Measurable

And finally, measurement. The most elusive and also possibly the most divisive component of communication strategy. Increasingly, someone somewhere wants to convert it all into a number. To know the ROI, the benchmark levels and the changes.

OPINION

In 2015, the Information Commissioner’s Office in the UK carried out 585 investigations into reported breaches of the Data Protection Act within the financial services industry. Almost triple the number of probes made in 2014 The right measurement could help you understand how effective you are and how the cul-ture is shifting. It could help inform about gaps, modifications to activities and benchmarking. It could be very useful in getting the resources you need, and lots of other fine, very good reasons. But it’s worth realising that it is not a simple or singular activity. There are some pretty easy ways to measure awareness, but really it comes down to the old adage of ‘things you can count or things that count’. “Did you see the poster?” is an awareness-

based question – you can put it to as many people as you like and get some hard numbers. But finding out if they actually carried out the action can be a completely different thing. And of course, it’s the critical thing. Having clear objectives at the outset will usually enable a set of appropriate measures to be formulated, or at least provide a glimpse as to what is going on, if not hard and fast proof. It’s worth remembering that in most cases the principle goal here is for long-term sustained behavioural change, not a reactive blip. In other words, the desired

behaviour becomes part of business as usual – the very DNA of the organisation. So perhaps, it’s also worth thinking about what the ultimate measure might be for Infor-mation Security awareness. This could be the ability of an organisation to recover from a security incident. This might appear a bit radical, but it is based on the premise that you can never absolutely mitigate against human error. It is when and not if an incident occurs. The true measure then is perhaps in the ensuing incident investigation, and the aftermath. And being

able to provide evidence as to how your organisation had taken all reasonable and appropriate measures to minimise and mitigate against such an incident. It’s reasonable to assume that any answer would have to include technology, training and people. Maybe then, the ultimate measure is therefore also the confidence of your organisation and leaders to be able to demonstrate that any incident was indeed an isolated case of individual behavioural dissonance and not a systemic failure of culture. So perhaps the ultimate measure is a measure of how well you or your CEO sleep at night… IFM editor@ifinancemag.com

Chris Barrington is Managing Director at employee communication agency blue goose

Oct - Dec 2016 International Finance Magazine

OPINION

Nigel Davies

Defending the UK’s financial trading sector

International Finance Magazine Oct - Dec 2016

The government’s intent “is for the UK to remain the top choice for European and global bank headquarters”

OPINION

ver the past decade, the nature of the threats to society has evolved beyond the physical world in which they traditionally operated. State-sponsored cybercrime and organised criminal hacking has become a threat to almost every sector that relies on an internet connection. Unsurprisingly, the financial trading sector is at increasing risk from such activity. Many countries are now waking up to the fact that protecting national security in an increasingly volatile geopolitical landscape requires more than the traditional military and law enforcement efforts of previous decades. Just two examples of recent national security breaches include an attack on the Ukrainian national power grid and an attempted $951 million heist on Bangladesh’s central bank (the thieves successfully stole $81 million). Cybersecurity firm Symantec has since found

evidence linking the theft to the North Korean government, along with a string of other statesponsored attacks against banks in South East Asia. The attacks against Ukraine and Bangladesh boiled down to one fact: malicious actors were able to exploit vulnerabilities in the critical national infrastructure (CNI) of entire states, resulting in severe consequences for both targets; an attractive end goal for any attacker. Defence review covers private sector This new kind of attack is reflected in the UK’s latest Strategic Defence and Security review. Evolving from its 2010 predecessor, the security of the private sector and civil society are now as much a part of the review as the military. From the ‘bombs and bullets’ approach of previous strategic policies, it is now concerned with defence against state-sponsored attacks, organised crime and protecting CNI.

The government’s intent “is for the UK to remain the top choice for European and global bank headquarters”, intending also to “build resilience to financial crisis”. Most importantly, it “will seek to develop long-term partnerships with industry, built on trust and collaboration, through better sharing of information and expertise1.” It’s clear that, given its importance to the UK’s economy, protecting the financial trading sector plays a big part in securing the UK’s CNI. At the moment, precise timing and synchronisation of financial transactions is critical to markets worldwide, is mandated by regulation in the European Union and is increasingly required in the United States. These high frequency transactions (HFT) involve moving millions of dollars in the space of seconds, with monetary values adjusting and reacting to real-time updates. To put it in perspective, the New York Stock Exchange handles

nearly $2 billion in trades in the first two minutes of opening. In order to allow HFT, the financial trading industry relies on timing sources and systems generally reliant on Global Navigation Satellite Systems (GNSS), such as GPS, to remain in sync with incredibly accurate timestamps. The MiFID II legislation, announced last year and coming into effect across the EU in 2018, dictates that trades have to be traceable up to 100 microseconds. The reliance on such miniscule accuracies and coordination makes the system and the source of time and synchronisation information an obvious target for attack. The vulnerabilities While GNSS has become a phenomenally successful, ubiquitous and reliable source of accurate time, it suffers from two fundamental vulnerabilities. The first is in the strength of the GNSS signals, which are used by receivers to calculate time and position. The satellites which transmit those signals orbit the Earth at an altitude of over 20,000 km, which means that the signals are very weak and vulnerable to interference by the time they reach Earth. In fact they are so weak as to be imperceptible from the background noise of other transmissions, requiring complex algorithms to identify and track them. An attacker who is able to transmit additional ‘noise’ over the top of GNSS signals can stop a receiver from

Oct - Dec 2016 International Finance Magazine

OPINION

Engineer Gary Bojczak was fined $32,000 for transmitting radio interference which disrupted the operation of Newark Liberty International Airport’s new air traffic control system

working properly, or at all. The most basic of jamming devices work by broadcasting excessive noise over the GNSS signal, resulting in the receiver’s inability to lock onto the signals broadcast by the GNSS satellites. The SENTINEL Project – a nationwide, UK government-backed investigation into GNSS jamming – tracked the proliferation of jammers, finding in one location more than 60 GPS interference incidents in six months. While most interference incidents are minor and go unnoticed, in some situations, the impact can

be substantial, leading to lost revenue. An example of this in action took place in 2009. Engineer Gary Bojczak was fined $32,000 for transmitting radio interference which disrupted the operation of Newark Liberty International Airport’s new air traffic control system. Bojczak worked for an engineering firm that tracked its vehicles using GPS. However, Bojczak installed a jamming device in his assigned vehicle to stop his employer tracking his movements. His daily work route would take him past the airport, subsequently interfering

International Finance Magazine Oct - Dec 2016

with GPS signals used by the aircraft landing aids on approach to the airport. The other vulnerability is the ease with which a false signal can be transmitted by an attacker to ‘trick’ a receiver into generating a false position or time. This is known as a ‘spoofing’ attack. The open access GNSS signals, which are widely used today by non-military users, are defined by open standards published on the internet. While this has led to a vibrant market in GNSS devices, it also means that the signals can be copied by an attacker. These two factors

combine to make the civilian satellite systems used by the financial trading sector highly vulnerable to tampering, blocking and disruption. Currently, devices which can create interference and disrupt the use of GNSS can be bought for as little as $40 online and are often no bigger than the size of a cigarette lighter. Spoofing attacks are more complex and, until recently, were considered to be only within the grasp of Nation States and militaries. However, a 2015 paper published by the Chinese Qihoo 360 security research firm demonstrated GPS

OPINION

spoofing using low-cost hardware and open source software. While there is only rare and anecdotal evidence of civilian spoofing attacks to date (for instance, reports that drug cartels are spoofing drones operated by the US Customs and Border Protection agency), most experts believe it is only a matter of time before attacks become more common. Mitigating threats The sheer volume and value of data in the financial industry that needs to be time-stamped by GNSS data leaves it at risk from interference. Interfering with a GNSS signal could have consequences for trading bodies calculating the correct time of trades and keeping up with realtime trade requests. Even an event that lasted only a couple of seconds may impact system performance or even cause a crash as timings between networks fail to match. In the era of HFT, this could be costly.

Audit trails would also become confused, with one party buying and receiving the share before the other has ‘officially’ sold it. This is crucial when regulators have started to clamp down on HFT fraud; an inability to unravel HFT trails could leave the industry open to market rigging. Such interference events are experienced by financial organisations. It is claimed that for roughly 10 minutes every day, the London Stock Exchange experiences problems with the signals it receives from GPS satellites due to such inadvertent jamming. Fortunately, as evidenced by the aims set out in the 2015 Strategic Defence and Security review, the UK is quickly coming to terms with this new age of threats and is looking to future technologies which can effectively secure the nation’s critical infrastructure. Over the next few years, the GNSS landscape will undergo a radical

change. New GNSS are being deployed by Europe (Galileo) and China (Beidou), GPS is undergoing an overhaul to GPS version 3, and the Russian system (GLONASS) is being modified to be more compatible with other systems. With more systems comes redundancy and resilience. The new and modified systems bring new services and diversity. A new generation of multi-constellation, multifrequency (MCMF) receivers provide security to a range of threats affecting GNSS, enabling high levels of robustness and security for time-stamping as demanded by financial trading regulators. In the event of an interference attack, the MCMF capabilities allow the receiver chips to access multiple systems simultaneously, switching seamlessly between over 100 satellites, crosschecking between signals for consistency, readjusting to the next available signal, or ignoring signals (either

spoofed or generated in error), which don’t agree with others. The European Galileo system will introduce the first civilian secure, encrypted GNSS signal, the Public Regulated Service (PRS), which will be available to government-authorised organisations; core financial infrastructures are candidates for inclusion. PRS adds additional resilience against interference and is very secure against spoofing. Combining the encrypted GNSS services with new MCMF receivers minimises the likelihood of system crashes and timestamp manipulation resulting from spoofing and jamming events. The use of these additional services together with resilient receiver processing techniques and robust design of the overall timing and synchronisation subsystems (e.g. using accurate atomic clocks disciplined by the GNSS timing signals) can effectively mitigate these threats. With the threat of interference significantly reduced, the financial trading sector can be effectively secured on an operational level, safeguarding its future in an era of growing technological threats. IFM editor@ifinancemag.com

Nigel Davies is Head of Secured Navigation, QinetiQ

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Rejigging banking to fit into your pocket Banks are closing branches as increasing number of customers opt for either digital or mobile banking Suparna Goswami Bhattacharya

International Finance Magazine Oct - Dec 2016

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

anks across the world are going through a transformation phase, which was not predicted a decade ago. But then again, a decade is a long time in this age of fast changing technology. Physical branches are facing the heat of the changing times and consumer preferences. In fact, in many places, banks are closing down their branches as they see an increase in the number of customers opting for either digital banking or mobile banking. For instance, Ulster bank, one of the largest commercial banks in Ireland, recently closed a few branches. An Ulster Bank spokesperson says, “Banking has changed significantly over the last few years as more customers are using digital technology to bank with us where and when it is convenient

for them. We know many of them do their banking online or on their mobile.” Keeping the new trend in mind, new entrants in this space are preferring digital only or mobile only channels and giving the traditional brick-andmortar model a miss. This comes even as banks are trying to align their services and strategies to cater to mobile before desktop or other traditional channels. The most interesting development is mobile-only banks Mobile-only banks are banking apps without any physical or desktop presence. The concept emerged about eight years ago with the objective of making banking convenient for consumers with the ability to manage finances entirely on the phone. Since then, the concept has gained significant traction in line with the rising popularity

of smartphones and the willingness of millennials to embrace non-bank financial services. Bank timing not an issue According to recent research by Financial Conduct Authority (FCA), the quality of mobile apps is ranked as more important aspect for bank customers than branch opening hours or queuing time. Paul Rippon, Deputy CEO, Mondo, says, “I see a continued long term decline in the number of physical bank branches. In line with broader sociological and technological changes, we are changing how we bank. We’ve moved from branches, to the telephone and increasingly, now, to our smartphones with apps.” Mondo is a mobile-only bank in the UK. With three in four people having a smartphone in the UK, the

“

Banking has changed significantly over the last few years as more customers are using digital technology to bank with us where and when it is convenient for them. We know many of them do their banking online or on their mobile Spokesperson, Ulster Bank

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

country has been one of the first adopters of mobile-only banking in the world. In India, DBS launched digibank, the country’s first and only mobile bank. “We have recently witnessed an exponential growth in the penetration of smartphones in India as well as around the world, which is the base for the success of the mobile-bank market,” says Shantanu Sengupta, Head, Consumer Banking Group, DBS, India. Smartphone users in India are growing at 18% annually. In conjunction with an increasing number of citizens opting to enrol for Aadhaar (a kind of social security number that involves bio-metric identification), the market technically is ready for growth of mobile banks. So far, more than 250,000 users have signed up with digibank. Old out of picture The most potent case study of the arrival of

digital and mobile banks is probably that of mBank in Poland. Known as BRE bank previously, it offered corporate banking services in Poland. In 2000, BRE Bank added mBank, an internet-only bank, to its portfolio. In 2001, it launched MultiBank, representing the traditional model of banking. Today, every branch division has been merged under one brand name — mBank. “We decided to change because we wanted to be more recognisable in the banking market. We felt that the mBank brand was the most popular of all our brands and hence, the company was rebranded under the new name,” says Cezary Kocik, vice-president of the management board and head of retail banking at mBank. Vivek Belgavi, partner and leader, Fintech, PwC, says, “mBank is probably the perfect example of how a bank can transform to remain relevant to

International Finance Magazine Oct - Dec 2016

the younger generation. The rebranding has been fabulous and is a case study for banks around the world.” Don’t just copy However, a blind copy-cat approach will not work. “We met some people from the mBank team earlier this year. They’re a great team and we share a similar outlook with them here at Mondo. However, I am not sure there can be a one-size-fits-all solution for brick-and-mortar banks and I look forward to seeing the paths they all take. There’s a clear choice — stay the same, change a bit or be radical,” says Rippon. Andrei Kozliar CEO, Touch Bank, a digitalonly bank in Russia, says, “It is easy to say we are branchless. However, new players should have something different to offer. There should be some kind of innovation as far as services or the product itself is concerned. A blind copy

I see a continued long term decline in the number of physical bank branches. In line with broader sociological and technological changes, we are changing how we bank. We’ve moved from branches, to the telephone and increasingly, now, to our smartphones with apps Paul Rippon, Deputy CEO, Mondo

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Andrei Kozliar CEO, Touch Bank, a digital-only bank in Russia

of the mBank success story may not work.” Russia happens to be one of the few countries wherein the government has been encouraging digital and mobile banking.

According to Markswebb Rank & Report, Russia has 18 million people aged 18 to 64 who use mobile banking services. Also, unlike mBank, not all big banks will find it easy

to transform overnight. “Even if they wanted to cut the number of branches, it would take a huge amount of effort to coordinate stakeholders and execute the closure plans,” says Rippon. Despite the growth of digital and mobile banking, experts do not expect physical branches to become extinct any time soon. Rather, there would be banks, though fewer in number, who will try and reinvent what a branch represents, and there will also be customers who value visiting a branch. IFM editor@ifinancemag.com

“

It is easy to say we are branchless. However, new players should have something different to offer. There should be some kind of innovation as far as services or the product itself is concerned. A blind copy of the mBank success story may not work Andrei Kozliar, CEO, Touch Bank

Oct - Dec 2016 International Finance Magazine

INTERVIEW INTERVIEW

â&#x20AC;&#x2DC;Now, we have to deliver even more than expectedâ&#x20AC;&#x2122; Interview with Cezary Kocik, Vice-President of the Management Board, Head of Retail Banking, mBank Suparna Goswami Bhattacharya What factors led the transition of BRE Bank from a corporate bank to retail banking and eventually mBank? When BRE Bank decided to establish its retail business, Poland

International Finance Magazine Oct - Dec 2016

was just past a decade of transition. It has driven Polish nation to a substantial, even if not crucial, change in behavioural model according to banking. Together with democratic system development, a truly

commercial banking developed and customers became more acquainted with this model. BRE Bank decided that this was a window of opportunity for a corporate bank to try and run a totally different banking

SPECIAL FOCUS: banking & PAYMENT INTERVIEW SYSTEMS

Cezary Kocik, Vice-President of the Management Board, Head of Retail Banking, mBank

Oct - Dec 2016 International Finance Magazine

INTERVIEW INTERVIEW SPECIAL FOCUS: banking & PAYMENT SYSTEMS

model, concentrated on the individual customer. Firstly, the management board decided to address the existing gap between market and technological trends, and what traditional banking players offer. That is why the first brand to be launched was an internetonly bank – mBank. Amongst arguments for this step was: (1) poor competition in an increasing market (2) rapid growth of internet and mobile phones users (3) the relatively low level of use of information technology in Polish retail banks (4) high level of acceptance of advanced technologies in the targeted groups of customers.

Had internet banking become popular by the time you started mBank? Well, actually – there was no internet banking when we started. Some other great banks tried to launch analogical products/brands, but never gained too much popularity. In December

2000, the number of people having access to the Internet in Poland was estimated at 6,300 thousand. At the same time (Dec 2000), the number of bank accounts for individuals in traditional banks had reached 11 000 thou. And the number of current accounts in the so-called electronic branches of traditional banks (including mBank, which started a month earlier) was a little over 89 thousand. So the estimated internet banking share in retail banking in total didn’t reach 1 %. But in West Europe, this share was already reaching more than 10% (e.g. 15 % in Great Britain, more than 10 % in USA). But the success of mBank was not only based on enabling banking via internet – other banks in Poland tried to do that and eventually failed. We succeeded because of the whole new model of banking, concentrated on offering attractive and simple product via modern

International Finance Magazine Oct - Dec 2016

channels and with use of new technologies. We succeeded because of the totally unique distribution system and treating customer fair, putting his needs first. We decided to highlight some strategic directions in our day-to-day business, which was: close relations with our customer, community building and reliability information. Was it difficult to convince customers to opt for internet banking? I suppose the success of mBank helped people overcome the initial hesitation. We were the first fully internet-based bank in Poland and today, we set the direction of the mobile and on-line banking development. We are one of the strongest and fastest growing financial brands in Poland. What purpose did MultiBank serve? MultiBank was a brand

created for customers who were more traditional, yet more affluent clients. MultiBank was a ‘higher culture’ bank, with comfortable branches, best customer service and advanced financial products. Contrary to mBank, it offered customer service in branches, with advisors waiting by the door. Its offer was also way more abundant than mBank’s. It also was extremely valued by people who expected unusually high quality of banking service and products. I would like to underline that we still service our affluent customers with ‘high culture’. Our branch advisors are still able to offer them the best customer experience and products. Only our logo is different. What prompted merging everything under mBank? mBank/BRE Bank decided to change because we wanted to be even more recognisable in the banking market; optimise marketing expenses, integrate corporate and individual banking in one brand and – last but not least: unificate our organisational culture. The times we live in require significant flexibility and simplicity. In this context, the mBank brand was elected from a range of brands in our portfolio as the best. A global Value-D study (by Millward Brown SMG/KRC) suggests that the brand is very strong, also globally. It is legible, flexible and comprehensible everywhere. It still has

SPECIAL FOCUS: banking & PAYMENT INTERVIEW SYSTEMS

large potential. I do believe that it will take us forward in the long term as one of the drivers of our winning market position. It is confirmed that a single strong brand will help us strengthen our position in the banking market and optimise the use of marketing budgets. Now every promotion campaign builds our image and brand awareness among all our customers irrespective of the segment addressed by

our activities. Each segment is a coherent whole, on the one hand distinguished by the colour range, and on the other hand, consistent through a single brand structure. The new identification system highlights the mBank Group’s adaptability to different customer segments by drawing on the bank’s extensive experience of 30 years in the financial markets.

How are you handling the pressure of mBank being considered the yardstick for digibanks? Hearing things like that is an enormous pleasure and also a proof that in today’s world it is crucial to invest in technology. But we understand, that in order to keep our business on track, we have to deliver even more than expected now. That is why we are working all the time to introduce

new solutions serving our customer best. The truth is that the best way to succeed is to see your customer as the most important and always – whatever the case is – treat him as the most important person in the bank. In June, the bank’s Supervisory Board approved a new strategy for 20162020. Focus will be on clients’ needs and mobility. The main pillars of the ‘Mobile Bank’ Strategy of mBank Group include: being closer to clients, further use of opportunities offered by mobility and regular improvement of business efficiency. In everything they do, mBank’s employees should be guided by the needs and preferences of the clients. mBank wants to remain synonymous with mobile banking with the focus on comfort, usability and simplicity for the user. IFM editor@ifinancemag.com

Name: mBank S.A. Location: Poland HQ: Warsaw Business: Banking Products: Retail banking, private banking, SME banking, corporate & investment banking Revenue: PLN 1.2bn (after Q2 2016) Deposits: PLN 85.3bn (after Q2 2016) Employees: 6,529 (after Q2 2016) Global footprint: Poland, Czech Republic, Slovak Republic CEO: Cezary Stypułkowski Owner: Commerzbank (69.49% of shares)

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Testing time for

DBS Bank

The Singapore-based bank launched its mobile-only operations in India in April Suparna Goswami Bhattacharya

International Finance Magazine Oct - Dec 2016

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

ith the cost of managing a physical branch rising and banks worldwide closing their branches, new entrants in the space are trying their best to disrupt the way the industry functions — by focusing only on the smartphone interface. Digital banks, as they are called, are basically financial institutions opting for branchless banking. However, they can offer all standard retail banking products, including current accounts, credit cards, savings accounts, personal loans, insurance and mortgages. For example, in the US, Atom Bank and Ally Bank are internet-only banks with a focus only on the smartphone interface. When Singapore-based DBS Bank launched its mobile-only operations in India in April, it raised quite a few eyebrows. Not because people doubted the company’s capabilities, but many were not sure if India

is ready for a mobile-only bank. DBS aims to garner five million customers and a deposit base of Rs 50,000 crore over the next five years. Named digibank, it is different from traditional mobile and internet banking applications that are just a digital channel on top of a bricks-and-mortar bank. It is an end-to-end bank in a mobile phone and allows individuals to access a wallet at first and then open a savings deposit account with the bank. The balance in the account will earn 7% interest per annum. India’s readiness Statistically speaking, India has the world’s second-largest mobile phone user base. It was estimated to have about 220 million smartphone users in 2015 and a February report by networking solutions firm Cisco forecast this would jump to 651 million by 2019. With increasing investment in roll-out of 4G network along with availability of low-priced

smartphones (as low as $30 - $40) and large unbanked population, the opportunity for mobile banking services is immense. Vivek Belgavi, partner and leader (fintech), PwC India, says, “For one, the demography of the country is a huge advantage. The majority of the population is young. They do not like to visit the bank. Though they are still a small set, it is a growing group.” Shantanu Sengupta, head, consumer banking group, DBS, says these are early days but feels positive about the overall market. “We have always been excited about Indian consumers, their level of awareness and adoption of digital platforms given the fast convergence of mobile technology and banking solutions in the country,” he says. digibank leverages India’s recent trend to embrace the digital economy, which has seen a surge in mobile phone ownership, social media usage and e-commerce

For one, the demography of the country is a huge advantage. The majority of the population is young. They do not like to visit the bank. Though they are still a small set, it is a growing group Vivek Belgavi, partner and leader (fintech), PwC India

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

India has the world’s second-largest mobile phone user base. It was estimated to have about 220 million smartphone users in 2015 and a February report by networking solutions firm Cisco forecast this would jump to 651 million by 2019

activity. Additionally, the widespread adoption of the national Aadhar card for digital identification makes things smoother for such banks. “State Bank of India, which is the country’s biggest bank, is also using a mobile banking platform and the trend is similar across other banks. The success stories of mobile wallet companies, like Paytm and Freecharge, are also a positive sign of acceptance of mobile payment services by Indian customers,” says Kalpesh Mehta, partner, Deloitte

Haskins & Sells. Sengupta adds that the Reserve Bank of India’s recent move to introduce Unified Payment Interface (UPI) is positive as ‘it would help us offer our customers even greater convenience besides helping them access their other bank accounts onto a single application’. User Experience The user experience in India, so far, has been a mixed bag. As these are still very early days, the adoption rate has not been much. DBS refused to comment on how many

customers have enrolled for their service stating ‘it is too early’. Since digibank has added a constraint on itself by not having a physical presence, it has resulted in them pre-empting the needs of customers. They have come up with quite a few innovative solutions, which can be replicated by the incumbents, indirectly benefiting the overall ecosystem. For instance, instead of having a call centre, digibank has a virtual assistant, ready to help and guide customers. “I feel the approach has

We have always been excited about Indian consumers, their level of awareness and adoption of digital platforms given the fast convergence of mobile technology and banking solutions in the country Shantanu Sengupta, head, consumer banking group, DBS

International Finance Magazine Oct - Dec 2016

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

been innovative. Instead of setting up a call centre, they decided to have a virtual assistant. Other banks have not taken any proactive measure in this regard mainly because they have the cushion of a physical presence,” says Belgavi. The overall experience of opening an account with digibank has been something most people have appreciated. It is paperless and bank representative comes home to take the fingerprint on a biometric device. The bank has tied up with Cafe Coffee Day outlets to offer the option of opening an account. “They are trying out unconventional channels. Some might work, some not, but nevertheless, we are seeing some kind of innovation,” remarks Belgavi. However, when compared to international mobile-only banks, like Atom Bank and WeBank, digibank has a long way to go. It is not as intuitive as it should be and people have to do a lot of searching themselves.

“The app is not very responsive and I feel this is one major area when they have to improve. The advantage of Atom Bank and WeBank is that their founders have a technology background unlike in India where the leaders are from a business or a management background,” rues Belgavi. “There are other teething problems as well,” adds Saurabh Tripathi, senior partner and director, BCG, “which does not make the experience very good. There are network issues and people have complained of their phones hanging while they are using the app.” As far as the look of banking apps is concerned, they are more or less the same. One also must remember that for millennials, who are digibank’s main target, apps are something they deal with every day. So the user experience benchmark is no longer internet banking but other apps as well which are available on the phone. If one takes that as a benchmark then the user

experience has got a lot more ground to cover. Understandably, there are some who are not very optimistic about digibank bringing in a banking revolution in the country. Benoy C S, director, digital transformation, MENASA, Frost & Sullivan does not think the product has anything new to offer. “As far as the customer is concerned, this is something that is already there. I feel it is more of a limiting factor. Other traditional banks have an edge over digital banks. For example, if at any point, if a customer has a problem, they can use the other modes of banking,” he argues. IFM

“

State Bank of India, which is the country’s biggest bank, is also using a mobile banking platform and the trend is similar across other banks. The success stories of mobile wallet companies, like Paytm and Freecharge, are also a positive sign of acceptance of mobile payment services by Indian customers Kalpesh Mehta, partner, Deloitte Haskins & Sells

editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Scott Dawson

Is there a future for

high street Banks? Yes, there is, but innovation is vital

International Finance Magazine Oct - Dec 2016

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

n a survey of 2,000 UK adults carried out in March 2016, over half (57%) said they were frustrated by their high street bank due to unfair bank charges, branch closures and IT failures. As well as expressing their irritation, many indicated a willingness to consider alternative providers of payments services. A quarter said they would rather trust a technology company with e-money transactions than a bank. This represents a sizeable shift in public attitudes

and openness towards more innovative means of payment. One could even pose the question: is there a future for high street banks? Erosion of trust and customer experience To explore the future of high street banks, we must first understand the current perceptions of these institutions in the mind of the consumer. By far, one of the biggest areas of concern is trust. Historically, banks have been seen as synonymous with trust, with phrases

like “you can bank on it” marking their dependability in popular consciousness. Yet, since the banking crisis, the authority and solidity of banks have been cast in doubt. And this, coupled with scandals, such as PPI and Libor rate fixing, have eroded trust and undermined the public reputation of banks. Alongside this erosion of trust, there is also growing frustration with particular aspects of banking services. Topping the list is unfair bank charges, with nearly a quarter of people (24%)

The biggest frustrations with high street banks according to a poll of 2,000 UK adults: 1. Unfair bank charges

24%

2. Branch closures

18%

3. IT failures

18%

4. Delays in my balance updating

16%

5. Mistakes

13%

6. Scandals

12%

7. Security breaches

12%

8. Lack of opportunity to talk face-to-face

12%

9. Lack of opportunity to talk over the phone

citing this as their biggest source of aggravation. In addition, 18% said branch closures caused inconvenience and a further 18% found IT failures, such as being unable to access an online account or have wages transferred on time, disruptive. The introduction of online banking and automated account management terminals have made services more convenient and accessible. And yet, the report has shown that these advancements in technology have actually contributed to the demise of the physical ‘high street’ bank. Trust between organisations and their customers is reinforced through regular engagement, with each contact opportunity helping to strengthen the relationship and forge a better connection. Now, however, the days of having a one-to-one relationship with your local bank manager are long gone. In fact, 53% of bank customers say they haven’t seen a member of the staff from their bank in the past year and 83% do so less than every six months. With the frequency of face-to-face interaction between banks and their customers declining, the opportunities to make more of a personal connection are fast becoming few and far between. Slow on the uptake While digital has become an all-encompassing part of our daily lives, more traditional industries, like banking, have been slow to

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

adopt new technologies in comparison to other sectors, like retail and media. This lack of innovation, and the evermore antiquated processes, haven’t gone unnoticed by customers – especially the younger generations. In our always-on, networked economy it’s astonishing that it can still take up to four days for a cheque to clear or up to six ‘working days’, and for a cost of up to £30, to send money to a different country. Today, more than ever, people expect efficiency and immediacy so what we need now is a more customer-centric approach to financial services.

An emerging alternative The digital economy is growing while customer frustration with high street banks is at an all-time high. Against this backdrop, e-money is emerging and rising in popularity

as the alternative to an increasingly out-of-date banking system fraught with inefficiencies. In the past two years, the number of e-money service providers has doubled and people are seeing them as a viable alternative. Almost a third (28%) of respondents aged under 35 said they would trust a technology company like Google or Apple with e-money transactions. This figure was even higher for under-24s, with 32% saying they’d place their trust in these organisations. While this apparent receptiveness is a shift for the sector, when you understand the benefits of e-money providers, it’s easy to see why. And while e-money can’t tackle all the customer frustrations the survey highlighted, consumers no longer see banks as the only way to take care of their financial needs. This is opening doors

to other businesses and brands that can provide financial services through a technology-led approach.

This is a stark contrast with the seemingly expensive and slow services on offer by most banks.

Time and money Fees and charges, for example, are the number one frustration of customers. And yet, these are considered one of the key areas where forwardthinking organisations are developing alternative services. For instance, companies such as GlobalWebPay. com offer international transaction services around 70-80% cheaper than traditional banks that usually complete within one working day. By comparison, most high street banks typically charge £15-£30 for a service that takes 4-6 working days. We’re now in a society in which we have become accustomed to services being delivered at minimal cost, or often free of charge.

A not so current account ‘Current’ accounts are a further cause of frustration for customers, with around a third of respondents wishing they could have a more accurate picture of their actual balance. Whether it’s cheques that take up to four days to clear, or direct debits and card payments that are not immediately subtracted from your balance, this lack of clarity is a real headache – particularly for those on limited budgets for whom every penny counts. Recognising the daily challenge this uncertainty can cause, banking-lite accounts are another option, giving more certainty and flexibility to customers. PrePay Solutions, for example, is a bankinglite provider that is experiencing exponential growth as an alternative to traditional current accounts. Handling €5bn of transactions in 2014, the company offers a prepaid account that gives real-time transaction information, a more detailed spending analysis to help budgeting and better rates when travelling aboard. Similarly, Raphaels Bank has partnered with Payment Card Technologies to launch the Change Account, a product that includes multiple purse features, mobile-based account management and faster online payments.

% people who would trust a technology company (e.g. Google or Apple) with e-money transactions

32 25.5

19.5

18-24

25-34

35-44

Age Group International Finance Magazine Oct - Dec 2016

45-54

17.5

55-64

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Almost a third (28%) of respondents aged under 35 said they would trust a technology company like Google or Apple with e-money transactions. This figure was even higher for under-24s, with 32% saying they’d place their trust in these organisations

A new generation of banking

mmediacy and speed are becoming an increasingly important differentiator for the consumer and this is of particular value to younger customers. Unfortunately for traditional banks, this audience group is the one segment of the population where trust levels are at their lowest. In fact, half of the 18-24 year olds polled stated they wouldn’t have faith in their bank in handling their transactions. There are a number of non-financial organisations that have recognised there is an opportunity in filling

the void with this millennial audience. Through the provision of e-money services, these organisations can build further loyalty to their brand adding new and useful benefits. Starbucks, for example, has launched an app that allows customers to load money directly onto it to pay for their purchases, collecting reward points as they spend. It also provides regular deals, news and member discounts, and even lets the customer order and pay for coffee in advance – collecting it when they’re ready.

Looking to the future So, to answer the question: is there a future for the high street bank? Yes, there is, but innovation is vital. In having an historical monopoly on the market, high street banks have rested on their proverbial laurels. With the backing of regulators, who are championing a more vibrant money market by simplifying the e-money operator application process, customers are becoming increasingly open to alternatives.

When it comes to the smooth running of the market for financial services, banks are essential. However, e-money service providers are challenging the industry with new services for the niche and mass market. Although these fledgling businesses may seem insignificant to these global institutions, if the past 15 years have taught us anything, it’s that organisations that lose relevance and relationships with their customers are soon superseded.

While traditional financial institutions are too integral to the economy to go in the way of high street stalwart as travel agents, banks would do well to heed the warning signs. It’s imperative banks ensure they’re delivering services that more closely meet the needs of their current and future customers. IFM editor@ifinancemag.com

Scott Dawson is commercial director at Neopay, a leading e-money and payment regulatory specialist

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Ahead of THe

game

Authentication solutions of Entersekt go beyond SMS and one-time password options Tom Jackson

International Finance Magazine Oct - Dec 2016

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

atience has proven a virtue for Entersekt and its founders, because as the world moves away from SMS and one-time password options, its innovative mobile authentication solutions have taken it into 45 countries worldwide, with offices in Atlanta in the US, Amsterdam in The Netherlands and Johannesburg in South Africa. The South Africabased company offers authentication systems for both online and mobile banking services. Transakt - its flagship product enables a one-touch user experience, with users spared one-time passwords or challenge questions and able to confirm their identity with a single touch in response to a pop-up verification request.

Simple but effective, and available as an SDK or a stand-alone app in all major app stores, Transakt is now being used globally to secure online and mobile banking services. It secures more than 50 million authentications each month at home in South Africa, but has deployments across Africa as well as in the US, UK, Germany and Switzerland. Middle East growth is next on the agenda. For founder Schalk Nolte, who has a background working for mobile companies such as Vodacom, VMobile, Celtel and Zain, the move towards mobile authentication has been coming for some time and will only continue to speed. â&#x20AC;&#x153;Nearly everyone has a mobile phone and keeps it close at all times. Each new handset represents

Nearly everyone has a mobile phone and keeps it close at all times. Each new handset represents a more powerful tool for accomplishing everyday tasks with greater personalisation and convenience Schalk Nolte, CEO, Entersekt

Oct - Dec 2016 International Finance Magazine

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

From left: Niel Müller; Schalk Nolte (CEO); Altus van Tonder; Dewald Nolte; Christiaan Brand

a more powerful tool for accomplishing everyday tasks with greater personalisation and convenience,” he says. “You should be able to do everything through your mobile device. In time, we are confident that you will. But to make the most of this channel, we have to dramatically boost protection of the device and communications to and from it.” Entersekt’s success was that it realised this earlier than most authentication providers, many of whom still interact and transact as if people still use greenscreen feature phones impervious to mobile malware and phishing attacks. By re-engineering digital authentication solutions to avoid use of one-time passwords or SIM cards, for example, Entersekt has stolen a march on competitors and positioned itself for global growth while many rival firms are

still adapting to the new smartphone era. ‘App-based approach’ “We took an appbased approach that uses advanced digital certificate technology and other proprietary validation techniques to nail down the user’s identity. With our

International Finance Magazine Oct - Dec 2016

technology, banks and other businesses can uniquely identify any enrolled mobile device as one owned and operated by a particular customer or employee,” Nolte says. This kind of security is vital in the modern era of online and mobile banking, with the mobile channel

having a growing number of vulnerabilities as a result of the ecosystem’s complexity and rapid evolution. The ecosystem is all a huge chain, involving handset manufacturers, operating system developers, network operators, app developers, and many more. Nolte says it only takes one weak link in that chain to expose a user to fraud. “Many of the security techniques developed to protect the PC are also much less effective on the mobile phone or tablet. The channel has its own special requirements when it comes to security,” he says. “Using our product, Transakt, banks can be certain they are communicating with a legitimate mobile device; their customers can be confident of the origin of bank communications; and no third party can access or alter their communications.

SPECIAL FOCUS: banking & PAYMENT SYSTEMS

Many of the security techniques developed to protect the PC are also much less effective on the mobile phone or tablet. The channel has its own special requirements when it comes to security It stops phishing attacks dead, as any of our customers using it will tell you.” First customer It took Entersekt three years to gain its first customer, South African bank Nedbank, and though is now seeing strong growth back home and across the world, Nolte says there are always challenges with serving financial services and banking institutions, and persuading them to adopt new solutions. But as more institutions in more countries begin using Transakt, gradually it is getting easier.

“It’s a conservative industry, so it really helps if we can point to an institution in the region that has vetted our technology and given us the big thumbs-up,” he says. “Our customers value what we provide, and we are very fortunate that they are active promoters of our solutions across the globe. We have also been able to follow our South African bank customers into foreign markets where they are active, Investec being one example. We are also expanding our reseller and OEM networks rapidly, especially in Africa, the Middle East, and Europe.”

‘Location is not a handicap’ Not bad for a company from the small town of Stellenbosch near Cape Town, best known for its ancient university and expansive winelands rather than its technological innovation. Nolte says these days being based in Africa is no longer the hindrance to international success it once was. “I don’t believe Africa is a handicap per se. The continent’s technology story is reaching a global audience now, especially when it comes to innovation in mobile payments and other

services. Opinion makers across the information technology industry are paying close attention to what’s happening in Nairobi, Cape Town, and Lagos,” he says. “My sense is that large foreign banks hesitate, less because our products were developed in Africa, and more because there are hundreds of vendors they can speak to in established technology centres that are much closer to home: Silicon Valley, New York, London, Dublin, Singapore.” All of this drives Nolte and Entersekt to ensure they remain ahead of the game in mobile authentication and take advantage of the opportunities their firstmover status has given them. “There’s a lot of money out there, a lot of excited media coverage. We have to work harder to be heard above that noise. A strong customer reference in the relevant territory does wonders from a sales and marketing perspective – it immediately makes us less of an unknown – but we have to secure that deal first!” IFM editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

‘PAMB staff walk the talk’ Prudential Assurance Malaysia Berhad won IFM’s award for Best Corporate and Socially Responsible Insurance Company International Finance Magazine Oct - Dec 2016

has £509 billion of assets under management (as of December 31, 2015). Prudential plc is listed on stock exchanges in London, Hong Kong, Singapore and New York.

rudential Assurance Malaysia Berhad (PAMB) was established in Malaysia in 1924. As a leading and innovative insurer, PAMB serves the savings, protection and investment

needs of Malaysians by offering a full range of financial solutions through its 45 branches and nationwide network of bancassurance distribution partners. PAMB is an indirect wholly owned subsidiary

of UK-based Prudential plc. Prudential plc is incorporated in England and Wales, and its affiliated companies constitute one of the world’s leading financial services groups serving around 24 million customers and

Malaysia and insurance sector Malaysia recorded a GDP of $296.2 billion in 2015 and is projected to grow by 4.4% in 2016 and 4.5% in 2017, according to new economic analysis from the World Bank. Malaysia’s Central Bank reported that economic growth continues to be driven by domestic demand and remains on track to expand in 2016 and 2017. The implementation of new regional trade agreements, such as the Trans-Pacific Partnership (TPP) and the European Union Free Trade Agreement (EUFTA), can help Malaysia implement economic reforms in four key areas of services, investment, competition and SME, which are needed to accelerate the country’s transition to high-income status. In 2015, the life insurance industry recorded a growth of 6.2%. It is expected to achieve a moderate singledigit growth in 2016 in view of the challenging environment. The increase in the number of lives covered by life insurance and higher sum assured protection show there is an increase in awareness among Malaysians on the importance of life insurance protection. Malaysia’s life insurance penetration rate currently

Oct - Dec 2016 International Finance Magazine

Award Winner

The Prudential Assurance Malaysia Berhad team

sits at 54% with an average sum assured of less than RM50,000. These statistics give an overview of the opportunities within the industry with the potential for higher penetration rate and increase in average sum assured. In line with the government’s aspiration to increase the penetration rate to 75% by 2020, PAMB is committed to its mission of providing financial protection and peace of mind to all Malaysians and, at the same time, maintain our position as one of the market leaders in the industry. In the last 10 years, the insurance industry grew 6% CAGR; it is increasingly positive and exciting to see how far the insurance industry has grown and what the future holds for one of the essential financial services. CSR initiatives PAMB’s Corporate Responsibility (CR) programmes are aimed at

International Finance Magazine Oct - Dec 2016

building a financially literate and resilient Malaysian society through our ongoing focus in providing financial protection for the urban low income households (LIH) with PRUkasih, and financial education targeting different segments of society ranging from children, teens and adults. This is in line with PAMB’s mission of providing financial freedom and peace of mind for all Malaysians. PAMB’s CR programmes are designed to meet the following: • Deliver meaningful service to the community that is needed, beneficial and within the core competency of our business. • Develop and grow a culture of volunteerism, service quality and care among our staff and distribution channel representatives in line with our brand tagline of ‘Always Listening, Always Understanding’.

•

Support Prudence Foundation’s* vision in providing innovative, focused and practical support to the local community. Support the Malaysian government’s Economic & Transformation plan in the area of financial protection for the lower income group and fostering financial inclusion. Support our key stakeholder, Malaysia’s Central Bank, Bank Negara Malaysia in their drive towards financial inclusion and financial education, as stated in their Financial Sector Blueprint 2011-2020. IFM editor@ifinancemag.com

* Prudence Foundation is the community investment arm of Prudential in Asia.

Award Winner

CEO says… PAMB CEO Gan Leong Hin says, “We are honoured that Prudential Malaysia has been recognised for its impact in helping low income families build financial resilience through our financial protection and education programmes. To date, our financial protection programme, PRUkasih, has reached out to 12,000 households while our financial education programmes have reached 12,000 children. The award for Best Corporate and Socially Responsible Insurance Company is even more meaningful as our corporate responsibility programmes are mainly run and championed by our very own employees and agents. Last year, we clocked up almost 8,000 volunteer hours. It is fantastic that our staff walk the talk in driving our company’s mission of providing financial freedom and peace of mind for all Malaysians.”

About the company

CEO Gan Leong Hin addressing colleagues

Name: Prudential Assurance Malaysia Berhad Location: Malaysia HQ: Kuala Lumpur Business: Life Insurance Products: Protection, Medical, Savings, Retirement Turnover: RM1.32 billion in new business sales during financial year ended Dec 31, 2015 Employees: 1600 Branches: 45 in Malaysia CEO: Gan Leong Hin

Oct - Dec 2016 International Finance Magazine

OPINION

Alejandro Gonzalez

Pedro Fernรกndez

Implementing

digital International Finance Magazine Oct - Dec 2016

How financial institutions can develop digital strategies as bricks and mortar become obsolete

OPINION

he way customers interact with banks and insurance companies has changed: according to Eurostat and The Financial Brand, as much as 40% of banking customers in the EU are active online banking users. That number rises to 61% in the US. We expect this number to rise to 83%–89% in the EU by 2020. What we expect from financial institutions has also changed. Brickand-mortar institutions are becoming obsolete quickly. According to a survey among European youngsters, 70% would rather go to the dentist than visit a bank branch. Today, we do most of our transactions online (in Spain, 65% of online transactions versus 35% offline for the average online user, estimated for 2015), but most of our purchasing offline (75%). However, that is likely to change in the future. Companies define and implement digital with different organisation setups Our experience reveals that most companies do not have clear strategies on how to organise digitalisation. Results from an internal European survey reveal that 73% of companies rely on top management to define digital strategy – a correct approach, in our opinion, but then implementation is developed by top management in one-third of all companies, which is wrong by all measures. Only 18% of companies rely on central digital

organisations to implement their strategies, 36% having it delegated to specific departments; the most common are IT and clients. Most surprisingly, 14% of all companies have no clear guidelines about who designs or implements the strategy. So, who is right? Setting aside those who rely on top management to implement the strategy and those who do not have a strategy, distributed implementation responsibilities are more common than a central department, by a 2:1 ratio. Does this mean that distributed is better? Chief digital officer versus decentralised digitalisation Digitalisation affects many different aspects of the organisation: processes are to be changed, product definitions to be rethought, operative and commercial channels to be affected.

Responsibility over those functions is often spread through the organisation. Therefore, any digital transformation plan must coordinate different areas and teams, each one working with its own point of view and agenda. When implementing the plan, two main options arise: • Chief digital officer (CDO): Setting up a central organisation under a CDO, who is accountable for all digital projects in the organisation, with a digital budget, resources and responsibility over main digital transformation KPIs • Decentralised digital functions: Distributing key digital functions (defining digital processes, fine-tuning digital channels, adapting products to the digital world, new ventures)

among the traditional owners of those functions Generally speaking, a CDO and a digital department are better for steering a common strategy. Decision-making is easier, there is more agility and initiatives are better coordinated. Also, responsibilities are clearer, KPIs easier to follow and objectives simpler to set. It also is a better option to ensure adoption of agile methodologies in the organisation and change management towards a digital culture in general that facilitates interaction with IT leaders. On the other hand, distributing functions also has several advantages: the implementation is done closer to the line of business, and the business priorities are therefore easier to harmonise with the digital strategy. Secondly, the particularities of

Oct - Dec 2016 International Finance Magazine

OPINION

Only 18% of companies rely on central digital organisations to implement their strategies, 36% having it delegated to specific departments; the most common are IT and clients

different BUs are better taken into account. Thirdly, authority is easier to build, and the â&#x20AC;&#x2DC;we-know-bestâ&#x20AC;&#x2122; argument can be better avoided. In any case, if the company is to go with the CDO, everybody involved should be aware that it is to be, by definition, an interim solution, available only as long as the company is transforming. The aim of the digital department should be to transform the aspects that ought to be changed and then quickly transfer those functions to the line of business. A CDO who wishes to preserve his job rather than transform the company would be a hindrance to digital transformation.

Traditionally, financial institutions have understood the digital market as an independent one, and thus have undertaken digitalisation through the development of offshoot digital companies. In developed markets such as the UK and Spain, many of the top-10 insurers have followed this approach. Our opinion on this strategy is that this was good enough in the past, but is not advisable anymore. The virtue of this tactic used to lie in the fact that you could test digital technology and the digital market without having to radically transform the parent company or cannibalise your own clients. This is not the issue any longer (digital

technology is well tested and the digital market is not a niche one anymore, but the mainstream of clients), and it has considerable drawbacks, such as duplicate investments and lack of digital adaptation within the parent company.

are adapted to digitalisation (strengthening BI, channels, product areas, etc.). However, it is also a fact that radically new digital functions arise because of digitalisation. For these, new capabilities must be developed or acquired.

The new roles in a digital organisation As we have stated, in a bank or insurer, the objective of digitalisation is to transform the core of operations and processes. The outcome of the transformation should not be the growth of digital functions in parallel to core functions (i.e. digital channels versus traditional channels), but to transform current functions so they

What is the role of IT? It is a common mistake to associate digitalisation with IT. IT is undoubtedly a critical enabler of digitalisation, but there is much more to digitalisation than having the technology. The business point of view is critical when defining digital channels, customer interactions, products and even internal processes. All along the way of digital transformation, IT must play a very active role because most of these aspects to be defined will impact the technological architecture or technical components that must be assessed. IT must then play a role as a facilitator and guide the company towards innovative technical solutions that help achieve defined goals. IFM editor@ifinancemag.com

Alejandro Gonzalez is Partner at Arthur D. Little and Pedro FernĂĄndez is Principal at Arthur D. Little

International Finance Magazine Oct - Dec 2016

Brexit

Banking in

the dark Banks in the UK and Europe are looking at the challenges before them Tim Evershed

urope’s banks are beginning to deal with the impact of the UK moving slowly but inexorably away from the European Union. The immediate impact of the Brexit vote was a shock to banking share prices with £40bn wiped off the value of UK banks alone. Despite some recovery, as the surprise of the referendum result faded, this has left partially state-owned banks, like Royal Bank of Scotland and Lloyds, with share prices below their bailout values making it difficult for the government to complete their privatisation. The Brexit vote also led to the Bank of England releasing its ‘rainy day’ buffer of $5.7bn and allowing banks to dip into their capital reserves in order to keep lending. Sure signs that normal times are over for the UK economy and the central bank expects more stress.

Following the referendum, the plight of several eurozone banks worsened sharply. The problems in UK banks are dwarfed by the mayhem in the Italian banking sector where €200bn in non-performing loans saw share prices plummet 50% earlier this year. The banks at the centre of this crisis include Italy’s largest lender, UniCredit, and the world’s oldest and the country’s third-largest bank, Banca Monte dei Paschi di Siena (MPS). The situation has left the Italian government contemplating a major banking sector bailout that would breach EU rules on state aid. These issues are potential flashpoints that pose wider risks to the other banks in the eurozone and the rest of the continent. In fact it is providing the first significant test of the new

International Finance Magazine Oct - Dec 2016

regulatory system that was put in place following the last crash. Questions about stability “By any measure, a number of large European banks are seriously undercapitalised—with Italy’s in the lead. And, other financial systems are exposed to these problems. Everyone knew about the referendum months in advance, giving them plenty of time to prepare. Yet, we are left with some fundamental questions related to global financial stability,” says Stephen Cecchetti, Professor of International Economics at the Brandeis

Brexit

Oct - Dec 2016 International Finance Magazine

Brexit

International Business School. “Do banks have sufficient capital and liquidity to withstand the ‘shock?’ Will financial markets continue to serve their key functions? Or, is the financial system only as strong as its weakest link,” asks Cecchetti. “The UK authorities have done a reasonable job of strengthening their banks and financial system. They have taken to heart that a healthy banking system is the foundation for strong, stable and balanced growth. “Unfortunately, unless the global financial system as a whole is well capitalised — which we doubt — the system remains only as strong as its weakest link. And, the increased postreferendum concerns evident in financial markets regarding several continental institutions appear warranted.” The Brexit negotiations between the UK and EU look set to be both prolonged and complicated.

The UK will be keen to preserve its access to the single market – including the financial sector – while the EU will want to extract concession in order to extend this privilege. Challenges before banks The UK’s vote to leave the European Union has added to the revenue challenges faced by European global trading and universal banks (GTUBs), according to Christian Scarafia, Senior Director, Financial Institutions at Fitch Ratings. The rating agency says that higher market volatility and activity in certain asset classes, notably in foreign exchange, had bolstered sales and trading revenue for all European GTUBs in the short term. However, it expects increased economic uncertainty to lower transaction volumes in the medium term. “Underwriting and advisory revenue is likely to be depressed as corporates

International Finance Magazine Oct - Dec 2016

postpone issuance and acquisitions until capital markets are more favourable and businesses adjust to the new operating environment. Subdued issuance and corporate actions could affect trading volumes, putting further pressure on profitability,” says Scarafia. The two European banks most reliant on capital market activities are Credit Suisse Group and Deutsche Bank. They have sales, trading, underwriting and advisory revenue at about 50% and 40% of total group revenue, respectively. In addition, these two banks, along with the UK’s Barclays Bank, are already undergoing substantial restructuring, cutting costs and reallocating resources as they adapt to more challenging capital markets and changed capital requirements. The Brexit vote is expected to complicate staffing decisions further as it may cause relocations,

The Brexit vote is also likely to have further delayed broader European economic growth, which would put pressure on European commercial banking revenue more generally Christian Scarafia, Senior Director, Financial Institutions at Fitch Ratings

Brexit

The problems in UK banks are dwarfed by the mayhem in the Italian banking sector where €200bn in non-performing loans saw share prices plummet 50% earlier this year particularly away from London, as well as adding to revenue woes. Uncertainty about growth The referendum result has added uncertainty about global economic growth with the International Monetary Fund calling it a ‘spanner in the works’ of global recovery and downgrading its forecasts. However, the sharp depreciation in Sterling should be neutral to positive for earnings, says Fitch. Scarafia says, “Most European GTUBs’ sterling cost bases are larger than sterling revenue. There

is also the benefit from increased FX transactions. We expect the impact on regulatory capital ratios to be contained, as the groups at least partly hedge FX mismatches between their equity base, risk-weighted assets (RWAs) and leverage exposure. “Nevertheless, any large position losses could lead to a rating review if they indicate increased risk appetite or ineffective hedges.” Fitch also expects net interest margins to remain under pressure, as central banks are likely to keep interest rates lower for longer.

Scarafia says, “The Brexit vote is also likely to have further delayed broader European economic growth, which would put pressure on European commercial banking revenue more generally. “The most significant long-term issue is maintaining the ability to sell products and services to the single European market, given most banks’ significant presence in London. But we expect any operational changes made to preserve this access to be only gradual and manageable. Banks based in the eurozone should be better placed, as substantial business is already undertaken from Frankfurt or Paris.” The business of Brexit looks likely to be a longrunning saga with many questions yet to be answered as the UK and EU disentangle themselves to a greater or lesser degree. IFM

Do banks have sufficient capital and liquidity to withstand the ‘shock?’ Will financial markets continue to serve their key functions? Or, is the financial system only as strong as its weakest link Stephen Cecchetti, Professor of International Economics at the Brandeis International Business School

editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

Brexit

To stay or relocate? Frankfurt, Paris, Dublin and Luxembourg are all readying themselves if London should lose out Tim Evershed

International Finance Magazine Oct - Dec 2016

Brexit

uneâ&#x20AC;&#x2122;s Brexit vote set the UK on course to leave the European single market, a decision that is set to have numerous financial, legal and bureaucratic ramifications for the financial services sector in the City of London. London is currently the undisputed financial capital of Europe with an unrivalled concentration of banks and insurers as well as an extensive professional services ecosystem that has evolved to support them. The City is home to the European Banking Authority (EBA) and hosts the European headquarters of a multitude of major international banks - thanks to the EU passporting system. London is also the site of the clearing houses that dominate Euro-denominated trading and can process trades with a value of more than $1 trillion per day. Previously, the European Central Bank (ECB) has tried, unsuccessfully, to force the flow of euro-based transactions out of London and into the eurozone, and is set to make another attempt. However, the Brexit vote saw share price falls for UK banks while the countryâ&#x20AC;&#x2122;s sovereign credit rating was downgraded. It also means that the EBA will have to relocate while other entities may find it advantageous to follow.

Oct - Dec 2016 International Finance Magazine

Brexit

Alternative European financial centres, such as Frankfurt, Paris, Dublin and Luxembourg, are all jostling for position and readying themselves to gain if London should lose out. “Following the UK’s decision to leave the European Union, many banks and financial services firms are having to consider where best to locate certain parts of their workforce. “Financial ‘passporting’ is vital to the work many banks undertake across Europe and they will have to think carefully about which city within the EU their interests and their clients’ interests will be best served,” said Tim Cuddeford, a member of Synechron’s Business Consulting Practice.

Job exodus Around 20% of London’s banking and financial jobs,

equating to 80,000 roles, could form part of a job exodus worse than all the years of the financial crisis because of Brexit, according to the Boston Consulting Group. That would be worse than the 55,000 jobs lost in London’s financial sector during the years of the financial crisis between 2007 and 2010 and would hit several areas, including international payments transactions, investment banking and trading. The leading alternative As well as being at the heart of the eurozone’s largest economy, Frankfurt is already the centre of European supervision for banking and insurance. The European Central Bank, which dictates monetary policy and supervises the biggest banks, is located in the city as well as

International Finance Magazine Oct - Dec 2016

the insurance regulator EIOPA. It is already home to 200 foreign banks and is now favourite to be the joint headquarters of the London Stock Exchange and Deutsche Börse, if and when, their proposed merger completes. Frankfurt is confident that it is the best location for the EBA and is preparing to absorb any financial sector workers that do move from London. Pros & Cons The area’s regional marketing agency has already aimed at welcoming finance workers while a promotional video shows off the region’s assets, and includes couples wandering through vineyards in misty sunlight and amid the gleaming glass and chrome towers of the banking district. The agency has also set up a 24-hour telephone hotline manned by native English speakers, which it says has been busy. The perceived obstacles are the high German taxes and strict labour laws, which are off-putting for some, as well as Frankfurt’s reputation, albeit one it’s trying hard to shake, for being a little dull. Dr Wolfgang Dorner, banking expert and head of BCG Frankfurt, said, “The economic and political stability in Germany, combined with access to a highly qualified talent pool make Frankfurt am Main a leading choice in location, “German cities should prepare for job relocations in various industries and actively seize the opportunities offered by this

German cities should prepare for job relocations in various industries and actively seize the opportunities offered by this influx of qualified workers. France has also promised to welcome bankers and banking operations if companies lose passporting, or the ability to do business with the whole of the EU, after Brexit Dr Wolfgang Dorner, banking expert and head of BCG Frankfurt

Brexit

influx of qualified workers. France has also promised to welcome bankers and banking operations if companies lose passporting, or the ability to do business with the whole of the EU, after Brexit.” The other option The French capital Paris also started preparing for the prospect of Brexit well in advance of the referendum with a conference on the subject six months before the vote itself combined with a major lobbying effort. This has seen the city make a concerted effort to separate itself as an entity from the rest of France and its socialist president, Francois Hollande. Instead of the usual perception of France as a country with high taxes and tough labour laws, it has positioned itself as a welcoming place for bankers with a great quality of life. The city is already a major player in the asset management sector as it is the domicile of several large operators. It is also

attractive in terms of employing foreign workers, who enjoy a non-domiciled status for five years, which means their employers do not have to pay social security payments for them during this period. Despite these efforts, some bankers remain reluctant saying the city may as well be Havana or Caracas in terms of its taxes and politics. Elsewhere, both Luxembourg and the Irish capital Dublin have already been successful in attracting hedge fund business. Both domiciles specialise in back office functions for the hedge funds and will aim to capitalise if any relocate from London. Longer term, Edinburgh could find itself well placed if there’s another Scottish vote on independence as the Royal Bank of Scotland, which has a major London presence, is already headquartered there. However, research from Synechron has shown that moving banking jobs around the continent will

prove a costly exercise. The company calculated its figure using estimated relocation, hiring and redundancy costs, new building and rent costs and other infrastructure & some contingency costs. Cuddeford said, “Our calculations show that it could cost these firms on average £50,000 per employee to relocate parts of their workforce out of the UK, perhaps to financial centres such as Amsterdam, Dublin, Paris and Frankfurt.” However, Allianz Chief Economist, Mohamed El-Erian said London would remain the second global financial centre after New York despite Brexit. “Despite stiffer competition from Frankfurt, Paris, Dublin and Amsterdam, no one will reach critical mass to challenge London’s overall European dominance.” IFM

“

Financial ‘passporting’ is vital to the work many banks undertake across Europe and they will have to think carefully about which city within the EU their interests and their clients’ interests will be best served Tim Cuddeford, a member of Synechron’s Business Consulting Practice

editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

Brexit

How investors

view Brexit Research by financial intelligence company Preqin revealed a mixed response Peter Taberner

International Finance Magazine Oct - Dec 2016

Brexit

he eyes of foreign investors are now on the UK, following the shock decision to leave the European Union (EU), with assets, including real estate and company acquisitions, on their radars. Many analysts speculated that by leaving the EU, the UK pound would take a battering. So far the sterling has not disappointed, falling to 31 year lows against the US dollar, which has encouraged investors. Julien Jarmoszko, Standard and Poor’s equity manager from their global market intelligence division, reflected, “It depends on the returns on which assets investors most desire. We have seen Japan‘s SoftBank buy Arm

Holdings in the technology sector. In property, Madison International has spent £1 billion on UK real estate, mostly in London, an attractive proposition. We have not seen industrial companies or exporters purchased yet, as it’s difficult to know what will happen with the UK and the EU single market.” Another major deal involved the UK discount chain Poundland, which was taken over by South Africa’s retail group Steinhoff international, where both parties signed a £597 million agreement. “Investment banks are very active in conducting the deals, and there are a large amount of small intermediaries for smaller deals,” he added. “The sterling outlook is

an obstacle even if you may invest at a lower price, you need an exit plan and cash flow has to be ongoing. If you are investing in exports into Europe or in Canary Wharf, and if EU financial passport rights are lost, then companies may move. That results in surrounding amenities not being used, and valuations are lost. The number of transactions is slowly needing more clarity.” Looking to the future, investors will need to look at their profile, ‘Brexit’ uncertainly increases risks of investment, but opportunities are there for higher returns, for example in asset prices. “The UK has been open for business for a long time. You have the City of London, infrastructure is

“

It depends on the returns on which assets investors most desire. We have seen Japan‘s SoftBank buy Arm Holdings in the technology sector. In property, Madison International has spent £1 billion on UK real estate, mostly in London, an attractive proposition. We have not seen industrial companies or exporters purchased yet, as it’s difficult to know what will happen with the UK and the EU single market Julien Jarmoszko, Standard and Poor’s equity manager from their global market intelligence division

Oct - Dec 2016 International Finance Magazine

Brexit

Overall 32% said that would make fewer investments in the UK. They were followed by 27% of alternative asset managers and 23% of hedge fund managers who said that other countries would now be a safer bet there for foreign capital, the UK is still seen as a favourable place to invest, and stable compared to many countries,” Jarmoszko opined. Research from financial intelligence company Preqin revealed a mixed response from financial institutions in a report compiled after ‘Brexit’, with some investors saying that they craved more certainty in the UK.

Fund managers were asked what they thought the impact of Brexit would be over the next year. Hedge funds were the most optimistic, as 21% of fund managers said that they would make more investments. Whereas only 3% of private capital fund chiefs said that the UK would now be a more appealing investment proposition.

International Finance Magazine Oct - Dec 2016

From the alternative asset class, 14% of those questioned said that they would place more of their portfolio in Britain. Private Capital fund managers also said that they are more likely to pull away from the UK, due to lack of confidence in the country since ‘Brexit’. Overall 32% said that would make fewer investments in the UK. They

were followed by 27% of alternative asset managers and 23% of hedge fund managers who said that other countries would now be a safer bet. IFM editor@ifinancemag.com

Brexit

UK-Based* Fund Manager Views on Whether Brexit Will Lead to a Change in the Location of Their Business Operations

*UK-Based refers to managers with one or multiple offices in the UK.

Fund Manager Views on the Impact of Brexit on the Performance of Their Portfolios in the Next 12 Months

Alternative Assets

Private Capital

Hedge Funds

Oct - Dec 2016 International Finance Magazine

Brexit

Fund Manager Views on the Impact of Brexit on the Performance of Their Portfolios over the Longer Term 100%

Proportion of Respondents

90% 80%

38%

37%

70% 60%

Uncertain 7%

50% 40% 30%

0% Negative

13% 40%

40%

Positive

40%

20% 10% 0%

15% Alternative Assets

23% 9% Private Capital

Hedge Funds

Fund Manager Views on the Impact of Brexit on Future Investments in the UK

International Finance Magazine Oct - Dec 2016

No Effect

Brexit

Fund Manager Views on the Impact of Brexit on Future Investments in the Rest of the EU

Hedge Fund Manager Views on the Impact of Brexit on Their Performance since the Result of the Referendum

Oct - Dec 2016 International Finance Magazine

Brexit

Investor Views on the Impact of Brexit on the Performance of Their Alternative Asset Portfolios

Investor Views on the Impact of Brexit on Future Alternative Investments in the UK in the Next 12 Months

International Finance Magazine Oct - Dec 2016

Brexit

Investor Views on the Impact of Brexit on Future Alternative Investments in the Rest of the EU in the Next 12 Months

Investor Views on the Impact of Brexit on Investment with UK-Headquartered Alternative Fund Managers

Oct - Dec 2016 International Finance Magazine

Brexit

Service industry

could gain Various sectors are taking stock as the UK begins negotiating fresh trade deals with the EU Peter Taberner

ow that the dust has settled from the shock decision by the British electorate to walk away from the European Union (EU), the UK must decide how they will negotiate trade deals to maximise their prosperity for the future. One of the options is tariff free trade as a customs union, like in the case of Turkey. Also, the UK will have

to decide how much of the current EU trade regulations that is wishes to tear up, and whether sector arrangements, such as a ‘passport’ suggested for the financial services, can be agreed upon. It will also be up to the remaining 27 members of the trade bloc, in just how difficult that they wish to make life for the UK. Paul Hollingsworth, a UK economist with research group Capital Economics,

International Finance Magazine Oct - Dec 2016

said, “It’s really up to the politicians which free trade agreement that they design, and the concessions that the UK will have to make. One the most significant examples is access to the single market in terms of a fresh deal with the EU. That may come with freedom of movement, which is unlikely to be politically viable to Theresa May’s new administration. “Outside of the EU, trade deals can be about goods

and services only, and do not have to include people. The EU deal will decide to a large degree how much more control over migration the UK has. “The most advantageous trade deals that the UK should agree on are with fast growing and emerging economies. China’s growth might have slowed down, but there is still a rapidly growing middle class, with increased demand for goods and services.”

Brexit

In a recent study, London and Brussels based think tank Open Europe said that they were not optimistic about the UK out of the EU. GDP is now likely to drop by 0.5% to 1.5% in the long run if a reasonable trade deal is struck between the EU and the UK. After agreeing terms with the EU, the UK would then need to open its borders to the rest of the world. Open Europe cited countries, such as Norway, Australia and Canada, who have covered a large portion of their trade with bilateral free trade deals. An option for the UK would be to ditch the all or nothing approach of the EU, allowing the UK to strike

agreements on removing tariffs and non-tariff barriers. This would make sense for deals with emerging market economies, such as China, India and Brazil, where tariffs are relatively high and the majority of UK trade is in goods. Geographically, Asian could prove to be rich pickings for the UK, the think tank believed. Alongside China and India, there are the Japanese and ASEAN markets. Potentially, the UK could increase their GDP by up to 0.6% if free trade deals are put in place in Asia, reducing any negative effects of ‘Brexit’. Renegotiation of current

agreements could also prove profitable, particularly for the UK’s huge service industry. According to Open Europe, only 11 of the 33 EU free trade agreements cover services, leaving opportunities open for basic treaties for goods and tariffs. IFM editor@ifinancemag.com

“

The most advantageous trade deals that the UK should agree on are with fast growing and emerging economies. China’s growth might have slowed down, but there is still a rapidly growing middle class, with increased demand for goods and services Paul Hollingsworth, a UK economist with research group Capital Economics

GDP is now likely to drop by 0.5% to 1.5% in the long run if a reasonable trade deal is struck between the EU and the UK

Oct - Dec 2016 International Finance Magazine

Retail is looking fragile Hit by falling pound and uncertainties over migration Peter Taberner

International Finance Magazine Oct - Dec 2016

he retail industry is now looking increasingly fragile after Brexit with several issues such as the falling pound and growing uncertainties over migration. The early data after the referendum points to choppy waters ahead. Figures from the influential Confederation of British Industry (CBI) disclosed that in July, sales had fallen to their lowest level in four years, with their sales index falling to minus 14 from +4 in June. Retailers were also found to have reduced orders with their suppliers by the largest margin since the aftermath of the 2008 financial crash. In response, John Munro, a spokesperson for the

British Rail Consortium (BRC), said, “Our own retail sales monitor shows that sales have been increasing albeit marginally. It is far too early yet to judge the impact of leaving the EU. All sorts of things are happening in the economy. Retail is part of a wider economic confidence issue. “The biggest risks in the medium to long term is the cost of moving goods to and from the EU. For example, customs costs. This places pressure on retailer margins which are already low. We don’t know if that will transpire. It depends on the deal that we achieve from leaving the EU. “At the moment, the EU is tariff free. That is one of the core benefits. There are

Brexit

all sorts of other benefits we wish to see replicated. The single market is positive for retailers. How the government negotiates terms over the single market is up to them. We want trade barriers and costs as low as possible.” The BRC see a bright future for retail, as Brexit provides risks as well as opportunities. The EU can be a protectionist body. Now that the UK is out, greater access to priority markets globally can be achieved. “It is imperative to understand that there is no reason that any part of the industry should suffer, with consumers losing out if the cost of goods and tariffs may go up. For example in food and agriculture,

and imported goods for clothing manufacturers may be problem areas if the right trade deals are not completed,” he added. As fashion retailers often pay for their stock in dollars, the lack of strength in the pound is likely to hike their import costs. Next, one of the UK’s most successful retailers, with a store on most city and town high streets, said in their latest trading statement, that they have hedged all their currency exposure and will not be affected by the sterling’s devaluation until at least January next year. The impact of devaluation for next year has already been partially mitigated by pre-referendum hedging,

and currency offsets from euro and dollar overseas revenues. Based on current exchange rates, Next expects their costing rates to be 9% worse off than in 2016/17. And other mitigating circumstances are expected, such as Far East currencies, including the Yuan, weakening against the US dollar. Hitherto, Next are not drawing any firm conclusion over the impact that ‘Brexit’ will have on their business and the behaviour of consumers. IFM

“

At the moment, the EU is tariff free. That is one of the core benefits. There are all sorts of other benefits we wish to see replicated. The single market is positive for retailers. How the government negotiates terms over the single market is up to them. We want trade barriers and costs as low as possible John Munro, a spokesperson for the British Rail Consortium (BRC)

editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

Brexit: Exporters

You win some, you lose some Balancing act between benefits of a precipitating pound and inflation imposed on input prices Peter Taberner

xporters in the UK are bracing themselves for what is an unprecedented time for all sectors. In the short to medium term future, there is likely to be a balancing act between the benefits of a precipitating pound and the inflation imposed on input prices. This dichotomy was outlined in a recent IHS Markit purchasing managerâ&#x20AC;&#x2122;s index over the whole of the UK economy. For example, the manufacturing sector experienced a rise in fresh export business since the decision to leave the EU. But it was accompanied by a sharp increase in input prices, with purchase price inflation reaching a five-year high. According to figures released in June by the International Monetary Fund (IMF), throughout last year, machinery and engines provided the highest amount of export volumes, reaching 13.9% of the UKâ&#x20AC;&#x2122;s total

International Finance Magazine Oct - Dec 2016

Brexit: Exporters

overseas sales. JCB machinery are a prominent part of that equation and export to 150 countries, including EU member states. Company chairman Lord Anthony Bamford was one of the most prominent UK businessmen to support ‘Brexit’. He believed that this would open up trade routes for UK companies across the rest of the world, alongside building upon existing trade relationships. After the referendum result was announced, the company said that the UK now needs to look to the future. Lord Bamford said, “The UK is the world’s fifth largest trading nation. We, therefore, have little to fear from leaving the EU. European markets are important to many UK businesses, including JCB, and this will not change.” The oil sector The IMF also placed the oil industry as the fifth

highest export sector in the UK for last year, with $33.2 billion worth of business, amounting to 7.2% of the total of UK exports. Exxon Mobil Corporation is the parent company of the Esso, Mobil, and ExxonMobil companies that operate in the United Kingdom. They currently have interests in 40 oil and gas producing fields, and are responsible for 5% of the UK’s total oil and gas supply, highlighting the potential effect that Brexit could have on them. Richard Scrase, a spokesperson for Exxon Mobil, said, “Exxon Mobil respects the democratic process. Our investment decisions are based on a wide range of factors which include, but are not limited to, the political climate. The barrier-free movement of goods, people and capital across borders is important for a business like ours with operations across Europe.” On the flip side to Exxon Mobil’s position, Premier

Oil have interests in the medium sized oil fields in the UK, but the rest of the EU is not one of their major export lanes. In their trading update published in July, they explained that due to the sterling’s post Brexit weakness, they have managed to lock in £110 million of forward expenditure in the second half of the year at an average rate of GBR/USD $1.31. A reduction in capital expenditure and operating costs are expected if the current sterling/dollar exchange rate weakness persists, as over half of the company’s remaining 2016 capex and opex is denominated in sterling. Exporters will have to deal with the merry go round that Brexit has caused for some time to come, until the big political decisions are made. IFM editor@ifinancemag.com

“

The UK is the world’s fifth largest trading nation. We, therefore, have little to fear from leaving the EU. European markets are important to many UK businesses, including JCB, and this will not change Lord Anthony Bamford, Company chairman, JCB machinery

Oct - Dec 2016 International Finance Magazine

OPINION Brexit: OPINION

OPINION

Adrian Bell

The reality after THE Brexit vote A radical adjustment that we must get used to quickly 70

International Finance Magazine Oct - Dec 2016

OPINION Brexit: OPINION

t has been a wild time of late, since that fateful day in June when the UK announced it had chosen to Brexit. Sterling has been in freefall, the FTSE 100 index is exposed, trillions have been wiped off the world markets and the way forward is quite uncertain. The Brexit reality is looking rather gloomy, but as the finance community and markets adjust to the new economic paradigm, it is important to take a breath and reflect. What the UK has experienced may well go down in the history books as a revolution of the people against the governing elite. This anti-establishment vote has led not just the British nation but the whole of the global finance community into a wholly unprecedented economic regime. In contrast, the positivity in the markets on the day of the vote suggest that the decision to Brexit was somewhat unanticipated by the finance community; the FTSE 100 was at a two-month high on the day of polling and the pound was strong against the dollar. But if the markets ever took a narrow view of public opinion, misjudging the mood of the nation, it happed this

June. Next time, financial markets might take a wider examination of the political landscape when evaluating the investment climate. So Brexit is happening, and as the adjustment to the new economic paradigm gets underway, it appears to be in the property sector where the hit is making itself most known. Brexit is knocking on the doors of significant players – Standard Life, Aviva, M&G Investments – closing their commercial real estate funds due to exceptional market circumstances. Abroad, Singapore’s United Overseas Bank – a major lender against UK property

– moved quickly to close its books on lending to London. The UK’s financial services are also set to suffer, not just from the economic fall-out but also from the possible flight of human capital, as Britain’s highly skilled workforce consider more lucrative and productive careers elsewhere in Europe. The financial services sector is a considerable export for the UK and supports upwards of a million jobs. How it can continue to punch its weight outside of the European Union is a key question for the period ahead, but a lighter-touch

regulatory regime and the developments of new overseas relationships could help to offset the detrimental effects of Brexit. The devil will surely be in the detail of the chosen exit scenario, and employers will be watching developments closely. Until then, the ship could be steadied with carefully considered market interventions from the Treasury and Bank of England. Making money more easily available to companies, either through a fall in interest rates or quantitative easing, will be welcomed by businesses and the FTSE 100 index should

In contrast to historical major crashes, the shockwaves were not caused by any economic trigger. Rather, the epicentre was a single, isolated, democratic event, which has left the financial markets less in freefall, more taking stock of the new economic paradigm

Oct - Dec 2016 International Finance Magazine

OPINION Brexit: OPINION

respond positively. Such efforts may undermine the currency market however, and the value of sterling could drop even further than its present low between now and the end of the year. While this presents challenges to UK importers of foreign goods, it is a boon for foreign real estate investors, who stand to increase the values on their investment as the pound falls, while retaining the security and investment protection of the UK rule of law, which will at least be one thing to withstand the country’s exit from the European Union. A cut in corporation tax has also been signalled, and should help to preserve the impression that the UK is still a competitive place to do business. What the markets really are crying out for though is stability. And while Chancellor George Osborne was tweeting about being

in active consultation with the sector, the sudden resignations of other key political figures and the concomitant absence of strong leadership rattled the markets. For investors, the climate is one of nerves; any uncertainty is counterproductive when trying to stabilise a market. Looking back at what happened in the wake of the vote, it was a major sell-off of currency that left the pound in freefall. While British media took solace in fact that the FTSE 100 eventually rose to a level slightly higher than before the vote, there was far less coverage of the damage across the world’s equity market, which was much deeper. This also ignored that the rise in the FTSE 100 was fuelled by the cheap pound. The markets were being jolted by the outcome, but the shock was compounded by the fact that the fall

International Finance Magazine Oct - Dec 2016

came after a rather buoyant day for both the FTSE and the pound on the day that Britons went out to vote. In contrast to the cautious approach adopted by the markets two months prior, the big day itself saw the markets place their faith in the British choosing to remain in the EU. It is possible that private opinion polling commissioned by industry gave cause for this surge of confidence, but the concluding public opinion polls were too close to call. In the event the markets got it wrong, and found themselves rapidly adjusting to a new reality. The predictions for what would happen to the UK economy in the event of Brexit were characterised and chastised as being all doom and gloom by the commentariat. And then the world watched, as the pound plummeted and the FTSE 100 fell. However,

this economic plunge has not yet turned quite into the major crash that some had forecasted. In contrast to historical major crashes, the shockwaves of Brexit were not caused by any economic trigger. Rather, the epicentre was a single, isolated, democratic event, which has left the financial markets less in freefall, more taking stock of the new economic paradigm. The difference in this paradigm is the UK’s position as a financial centre now outside of the EU. It remains to be seen to what extent London will lose its financial clout as the city shifts under this new regime. The transition will be testing. But it is not just Britain’s financial sector that will be watching this closely; the eyes of the world are on the UK at the moment and it will likely be this way for a long time to come. IFM editor@ifinancemag.com

Adrian Bell is Chair in the History of Finance and Head of the ICMA Centre for Financial Markets at Henley Business School

OPINION

Dr Peter Hahn

The implications

of Brexit on London

There is likely to be little change in the retail sector, or high street banking, but the picture is less clear in investment banking

peaking in July, the International Monetary Fund (IMF) chief economist Maury Obstfeld provided his analysis of the UK’s decision to leave the European Union. Cutting its growth forecast for the economy from 2.2 per cent to 1.3 per cent in the coming year, he said the referendum

International Finance Magazine Oct - Dec 2016

had added “downward pressure to the world economy at a time when growth has been slow…the direct effects of Brexit would be felt most of all in Europe, especially in the UK.” Since the events of June 23, there has been much speculation about the economic impact of the decision and perhaps none more so than in

the banking and finance industries, where many experts have speculated on the City of London retaining its coveted status as the world’s leading financial centre. Indeed, and as Mr Obstfeld’s remarks suggest, much of the conversation has centred around opportunities and losses on both sides of the English Channel.

OPINION Brexit: OPINION

As with much of the referendum campaigning, it can, when reading through the newspapers, or watching various bulletins, be difficult to cut through the sheer quantity of information available to the discerning media consumer and gain an understanding of the likely impact of Brexit on the banking and finance industries. As a whole, the industry is as diverse as it is large, with different sectors running counterpart to one another. So while in some areas there may be greater opportunities for European financial centres at the City’s expense, in others the Square Mile may actually draw both human and economic capital to its businesses from the likes of Paris and Frankfurt. If we are to start with perhaps the most commonly understood sector – retail,

or high street banking – there is likely to be little change in the status quo. UK retail banking is undertaken in UK licenced banks whether domestically or foreign owned. We do not have any material retail presence that operates in the UK as an extension of an EU bank and, similarly, UK banks have not materially opened retail businesses in other EU countries that are branch extensions from the UK. So it is unlikely that UK retail banking needs any amended legislation to continue to function how it currently operates. The UK retail banking market is steady and is likely to remain so – in essence, the local branch of your bank will not up sticks and move to Paris, nor will its management. On the contrary, foreign owned retail banking

businesses in the UK with operating areas (i.e. computer systems, data storage) outside the UK might, subject to regulatory scrutiny, be required to bring those operations into the UK, but that remains uncertain. In times like these, it is always important to remember that banks, like all businesses, are about revenues and expenses. Fundamentally, if banks can find a way to move their operations to cheaper financial centres, then they will do so – as they have always done. Prior to Brexit, a number of UK led banking businesses had long moved jobs to places such as Dublin, Budapest and Warsaw in the EU and even further afield, with customer support departments being outsourced to the likes of

New Dehli and Kolkata, just as many jobs that were once in and around London have moved to Scotland, Manchester, Leeds, Belfast and other regional centres in the UK. Brexit might speed up this process, but it was a process that was already underway. Investment banking Turning our attention to investment and wholesale banking, the picture becomes less clear. Of the “big four” UK PLC banks, only two with investment banking arms based in London have international investment banking ambitions: HSBC and Barclays. During the referendum campaign, HSBC suggested it might move a relatively small number of posts to Paris where it has substantial operations through an established retail presence, but with most of its investment banking business likely to be focused towards its Asian ambitions, there isn’t much incentive to move. Barclays meanwhile, whose investment banking operations are largely USfocused (having bought the US business of Lehman), would also see reduced incentive to move. Yet, both HSBC and Barclays might decide that a limited number of ‘origination’ as opposed to ‘execution’ banker roles might be moved to within country offices in the EU – which are generally easy flights to London. RBS and Lloyds, meanwhile, were already in the process of exiting from investment banking largely

Oct - Dec 2016 International Finance Magazine

OPINION Brexit: OPINION

outside of servicing UK clients.

Ownership pattern The majority of wholesale, or investment banking, participants in the City are foreign owned and they largely used the City as a hub to EU markets and beyond. Acronyms like EMEA or Europe, Middle East, Africa abound at these banks. And it isn’t just banks, but many specialist financial players. Here, we need to think in terms of two broad “sides of the coin” and the often forgotten middle of the coin that connects the two sides – the ‘have money side’ — these are the investors, and the ‘want money side’ — these are the issuers, borrowers, sellers, etc. In the middle are the intermediaries that make things happen. On the have money side, investment which comes through the UK is likely to continue; it is hard to see any change here at all. Virtually all economic areas, the UK and EU included, welcome foreign investment

wherever it comes from (leaving out such nasties as money laundering). The business of working with borrowers and issuers might require more of a local presence, which could see an outflow from the City to EU business centres but not necessarily financial centres…Munich is nearer to many German industrial businesses than Frankfurt. Attention for job movement should be focused away from London and to the rest of the UK, on the support functions for wholesale banking and investment management, and these are a lot of jobs. A few US wholesale banks are amongst the largest private sector employers in Northern Ireland, Manchester and Dorset, to name just a few localities. But before seeing these go, it is important to note that moving any office or job is expensive and particularly the needs of technologically inherent banking. Banks might even exit businesses due to cost if they are forced to move. Beyond this exercise

International Finance Magazine Oct - Dec 2016

is the entire concept of EU fragmentation simply adding unrecoverable costs to wholesale banking. As we saw with Sterling’s sharp initial depreciation, perhaps where we can expect the most business volatility, as the implications of the referendum become clearer, is within the currency and trading markets. An unusual international anomaly exists in that the trading of Euro-dominated instruments that would ordinarily be considered ‘domestic’ assets, such as € derivatives, are largely traded and cleared or settled outside the Eurozone in London. This anomaly exists because the UK is in the EU and has been a contested matter between the European Central Bank and the UK. So the question arises whether human and operational capital in these businesses need to move to within the Eurozone. Central Counterparty Clearing Houses, or CCPs, which are financial institutions that facilitate transactions in derivative

markets, have an important liquidity function and may require access to central banking in extreme circumstances to maintain markets. Think of a US $ CCP suddenly needing liquidity. The Federal Reserve, the US central bank, might provide $ under appropriate circumstances when needed, but the Fed would not be expected to provide € or ¥. London based CCPs with € denominated contracts have liquidity access through the Bank of England, which in itself has a relationship with the European Central Bank so that € are available in London. How this relationship might change, is open to speculation. If it does change, then we can expect to see operational jobs in this sector move, which could include recordkeepers, support staff and IT roles. Though, this is also uncertain. Creative solutions should not be ruled out. ‘Easy leavers’ There are some “easy leavers” as well to consider – that is those institutions which are ultimately part of the EU, which are presently based in the UK. One such example is the European Banking Authority, which provides much in the way of technical regulatory efforts for the EU. In much of the world, this regulatory technical expertise is physically located in proximity to supervisory and oversight activities (in the Eurozone, these are led by the ECB). It is highly probable therefore

OPINION Brexit: OPINION

that roles associated with the EU European Banking Authority will leave the UK’s shores, with Frankfurt the most likely beneficiary – though rumours are that Madrid, Munich and others are seeking the EBA. A vast consulting industry around regulation would likely follow an EBA move to Frankfurt, but I wonder if that would be the case if it moves to another city. Those potentially moving include consulting and technical positions, as well as professional services staff. But then again, infrastructure and cost forces come into play. There are other areas of the industry where uncertainty governs and depending on the finer points of Brexit negotiations, could determine the future of these financial centres. There is, for instance, no fund management centre currently in Europe that could take the City’s place overnight or might not even want to. While centres such

as Luxembourg and Dublin offer skilled functions in this arena, they each have their own drawbacks. For example, Luxembourg has high costs and offers limited air transport connections with the Grand Duchy rumoured to have long resisted airport capacity increases. EU Regulation, often complained about, is unlikely to see a dramatic shift in emphasis. While it has been suggested freedom from EU markets will free up regulation in the UK, in truth any regulatory systems which interact with one another, as the UK and EU banking systems surely must, have a certain degree of parity – or equivalence – to facilitate access. In the long-run, what we may well see is a shift in focus within the City of London. The future could be as a regional off-shore specialist, which moves away from the traditional investment banking which has dominated the market forever in financial market

terms – this is the City of definition, to a private banking and wealth management-orientated, for those looking for improved returns from the widest possible asset selection. Much of the investment banking model’s profitability is being challenged today and this might occur regardless of Brexit. But there are a lot of advantages going for the City. A lot of money is and will remain invested in London; it has a good legal environment and has enjoyed centuries of financial stability. It is also located in a convenient time zone that facilitates trade between US and Asian markets, and the skills are here along with a vast infrastructure and a desirable living experience….there’s many a reason why regional cities don’t become international hubs. Championing the City Overall, the picture is not as clearly defined

as some would have us believe. While much of the speculation has centred on instability in the UK political-economic establishment, there has not been much consideration of the issues that the EU faces. The ultimate question about whether Brexit is an opportunity or risk for UK banking is, as mentioned earlier, about cutting through the information available and interpreting its impact on the market. Forecasts such as Maury Obstfeld’s are informative and indicative, but far from certain. However, one thing is clear. If today’s leading banks leave or fail to grasp existing and new opportunities, it is hard to imagine that another bank or financial institution won’t seize them. Perhaps the current uncertain – in new territory - environment of questioning how will we end up, rather than Brexit itself, presents the biggest risk. The banking & finance industry is much, much more than a monolithic business and urgent attention is needed to assure that the public understands its contribution. What the City needs is a champion who can speak for the industry’s vast interests, as well as demonstrating the value it adds to the rest of the EU. IFM editor@ifinancemag.com

Dr Peter Hahn is the Henry Grunfeld Professor of Banking at The London Institute of Banking & Finance

Oct - Dec 2016 International Finance Magazine

OPINION Brexit: OPINION

OPINION

Simon Ling-Locke

Has our perception of risks in the world

fundamentally changed?

n Friday June 24, 2016, the UK and the world woke up to the outcome of one of the most important political and economic referendums to have been held â&#x20AC;&#x201C; the UK vote on EU membership, or Brexit as most have called it. The result was a most unwanted outcome for many politicians and financial players in the UK, the

International Finance Magazine Oct - Dec 2016

EU and the wider world leading to instantaneous falls in the purchasing power of the pound and stock market values during the initial reaction of financial institutions and investors to the news. Markets are always reacting to news and it is a risk we are forever dealing with in the markets, whether that reaction is well founded through efficient interpretation of the information leading to assets finding

a new fair value or alternatively from players holding behavioural biases, such as group think, anchoring, herd instinct and so on, leading to increased volatility in values. The UK electorate has already reshaped the financial markets and from the result it would seem that large swathes of the population are more likely to listen to their peer groups rather than the wisdom of

OPINION Brexit: OPINION

England (it is estimated that over 3 million EU nationals are now living in the UK) and to a lesser extent selfdetermination rather than any other key reason for leaving the EU. The issue was also strongly fanned by some politicians and parts of the popular press in the UK. As such, I would say for many it was more of a protest vote. Politically, this is the biggest issue to affect the UK since the Suez crisis of 1956. The vote has split the governing conservative party down the middle, pitched old against young (young for in), London in particular against England (London for in), England against Scotland (Scotland voted to stay in) as the Scottish National Party will most probably seek another referendum on independence, and in Northern Ireland (voted to stay in) the Sien Fein party might try to press for unification with Eire but

Protestants will reject that out of hand and potentially this could be a match to re-ignite the animosities and conflict there amongst splinter groups. The new conservative leader and prime minister is in the unenviable position of disappointing half of the electorate whatever course of action is taken. Conservatives, after a honeymoon period for the new prime minister, helped by no credible opposition party at the moment, will eventually start to look very weak. On the opposition side, the Labour party is attempting to depose their leader, Corbyn, and, if handled well, that will open up the possibility of a new strong opposition leader coming in creating a major threat to the conservatives who the electorate will more than likely punish at the next general election. In effect, the political establishment and the UK civil service will be inward

looking for years to come. The wisdom and guidance the UK offers on the world stage will be diminished and it may be given less weight in international discourse than it would have received in the past, particularly from the EU but also others. The EU has a delicate balancing act for themselves. Other populations are just as discontent with the EU, so it cannot be seen to give the UK an easy ride for fear that others might follow suit, but that will lead to more animosity and longer uncertainty for the markets. I also think the EU Commission is fundamentally taking the wrong conclusion from the Brexit vote. Many there do not think it is about emigration and selfdetermination. President Junker of the Commission, in particular, has stated that there is not enough Europe in Europe and not enough Union in the Union. But for

experts. Warnings from leading politicians, central bankers, economists and the like of financial crises, difficulties, loss of influence on the world stage were widely ignored whereas perhaps in previous times there would have been greater trust in people who seemed to have more authority and knowledge. In this article, I will focus on whether Brexit is just an initial challenge to a wider anchoring of beliefs held in the markets and if so could the Brexit vote just be the breeze before the storm? Firstly, in my opinion the UK vote had far more to do with mass migration into

Oct - Dec 2016 International Finance Magazine

OPINION Brexit: OPINION

too many that just smacks of more centralism from a body which does not seem democratic or accountable enough to the populations of member states. Combined with poor economic outlooks, in particular for many Southern European states, and high unemployment, particularly amongst the young, the original EU founding ideals are hitting the hard realities of persistently high unemployment and no prospects for too many. In democracies, that is leading to more extreme parties becoming increasingly popular as they seem to be offering an alternative, articulating what they are against although, as in the UK, less clear on what policies they would be for! As such, the alternatives

could create uncertainty for markets and turn out to be rather unpalatable. In France, where a recent Pew Research Centre survey found 61% held an unfavourable view of the EU, the UK vote could influence next yearâ&#x20AC;&#x2122;s presidential election. Until now, Marine Le Pen of the National Front Party had been viewed as vocal but not a core threat, yet now her proposal of giving the French people a vote on the EU has been legitimised by the UK referendum. Time will tell how Le Pen will fare in the French presidential elections next year. However, I think a bigger risk to the stability of the EU comes from Italy. Unemployment is more serious there, much of the Italian financial system remains in crisis and the EU

International Finance Magazine Oct - Dec 2016

is blocking the governmentâ&#x20AC;&#x2122;s attempts to recapitalise their banking system, which is reeling under the weight of mammoth levels of nonperforming loans. The relatively new political party, the Five Star Movement, is quickly gaining popularity and their leader has called for a referendum on whether Italy should stay in the Euro. General elections, though, are not due to be held until May 2018, but there will be voting on constitutional reform in October 2016. Any failure which leads to early general elections could open up the door to the Five Star Movement. If the UK does not look a particular safe and stable environment for investors at the moment, then what does a large swathe of the EU look like

for institutional investors? A second wave of Euro sovereign crises could materialise. These are just some of the issues facing Europe today. In a few months, there will be presidential elections in America. Only a few months ago, the general perception was that Donald Trump would never become the presidential candidate for the Republicans, and yet he has. Many think he is unelectable, yet for many there is deep dislike and distrust of Hilary Clinton, the establishment and status quo she projects. Whilst many believe Trump is unelectable, most of the establishment and the financial markets never thought the UK would vote to leave the EU! Trump has perhaps touched a chord with people of their frustration that they have not reaped the rewards of globalisation and the information age, which has hollowed out traditional industries in the West. The establishment does not listen to them and they no longer feel they have the potential to do better than their parents, a cherished American dream. How will the markets react waking up one morning to find the next president of the USA might be Donald Trump? If he should be elected, then consideration needs to be given to his administrationâ&#x20AC;&#x2122;s policy direction. We would likely see an Americacomes-first policy with more protectionism, particularly against China, and the death nail to the conclusion of the current negotiations on an EU-USA trade treaty.

OPINION Brexit: OPINION

The possibility of a Europe in bitter recriminations with a disintegrating Euro and an America putting up walls (both literally and metaphorically) pose major risks to world trade, the financial system and the management of cross-border wealth. At the moment, everything is speculation and I for one certainly hope these possibilities do not come to pass! The world we are in today is more uncertain than at any recent time,

probably more so than with Lehmans when, after its collapse, we knew that sensible heads at Central Banks and governments would have to step in. Such uncertainty is the rocket fuel for speculators, which could result in wild swings in the markets in coming months. Businesses on the other hand do not like uncertainty and this will lead at best to a pause in investments, expansion plans, mergers and acquisitions. Recessions would lead to government deficits

growing faster again. Yet, if more austerity measures are implemented by governments, it is only going to alienate even larger parts of the electorates in Europe, which could light the powder keg of discontentment against Germany and the Euro. Added to these potential scenarios is the ease of extremists to organise over the internet, to manage information and influence peer groups and then you have a cocktail which makes the job of leaders

and compromise that much more difficult, ultimately creating more risk. All in all these are very dangerous times for Europe and the world and it needs calm government heads to find a way through this selfcreated minefield. As the Chinese say, â&#x20AC;&#x2DC;may you live in interesting timesâ&#x20AC;&#x2122;. IFM editor@ifinancemag.com

Simon Ling-Locke was the head of the European leverage finance and corporate teams at UFJ Bank and managed a book of over $2 billion in assets. He has in excess of 30 yearsâ&#x20AC;&#x2122; experience in international markets and has worked for 25 years in the syndicated loan market gaining a wide range of experience across risk management, particularly credit risk and distressed debt, in major banking organisations, including Barclays, Tokai and UFJ banks. He has dealt with risk management across borders and has covered various business sectors, including chemicals, construction, food, hotels, manufacturing, retail, power and project financing.

Oct - Dec 2016 International Finance Magazine

INTERVIEW INTERVIEW

‘Strengthen Italy’s Atlante’ IFM spoke to Carlo Milani, Research Economist at Polytechnic University of Milan and CEO of BEM Research on Italy’s and the continent’s banking system Giovanni Puglisi

urope’s banks stress test highlighted a crisis in the Italian banking system, in particular Banca Monte dei Paschi di Siena (MPS). Prior to the tests, MPS saw its shares drop more than 30% in two days after the European Central Bank (ECB) ordered the lender to cut billions in bad loans and prompted Italian market regulator Consob to suspend selling as the stock plunged. The oldest bank in the country and in the

International Finance Magazine Oct - Dec 2016

world reacted to the poor result of the stress tests with the announcement of a €5bn capital increase to avoid a bailout. Brexit erupted in the middle of an existing crisis, worsening the scenario and further denting investor confidence in the banking system and more broadly in the country. Investors are wary about the solidity and lack of liquidity in the Italian banking system due to the heavy burden of nonperforming loans (NPLs), which

amount to over €360bn. According to analysts at Bank of America Merrill Lynch in London, “a systemwide solution for Italian banks is unlikely to be secured by the Italian government in the short term”. They instead predict a move to ensure “ad hoc cushions for specific banks” to limit market pressure while negotiations for a more comprehensive plan are likely to continue for months. MPS is not the only bank in trouble, the entire country and even

INTERVIEW

Carlo Milani, Research Economist, Polytechnic University of Milan and CEO of BEM Research

Oct - Dec 2016 International Finance Magazine

INTERVIEW INTERVIEW Brexit: INTERVIEW

the continent’s banking system is facing the risk of a collapse. To better understand what’s at stake, where the problem originated and possible future implications, IFM spoke to Carlo Milani, Research Economist at Polytechnic University of Milan and CEO of BEM Research.

Could Italy’s banking problems mushroom into a broader European crisis? Yes. Italy’s banking crisis could have consequences for the whole Europe due to both risks of contagion and of sustainability of Italy’s public debt. The problem is indeed twofold. There are concerns regarding the resources needed to rescue the troubled banks, and the likely new recession that would derive from it.

Is MPS the only ‘sickest ‘patient’ or are other Italian and European lenders also on the verge of getting hit hard by the ‘Brexit epidemic’? Among other troubled banks in Italy, both Carige and Unicredit are on the radar due to problems related to low capitalisation and profitability. In Europe, the other big ‘sick patient’ is Deutsche Bank, while other Landesbanken are also involved. On the other hand, Greek banks obviously are not immune from this difficult scenario. Nonperforming loans are an endemic problem of Italy’s banking system. When did it start and why hasn’t it been addressed earlier? Nonperforming loans were born out of the mismanagement of credit since the start of the euro. Low interest rates prompted

International Finance Magazine Oct - Dec 2016

loose loans, especially to businesses, leading to the bubble that burst amid the crisis. The problem wasn’t acknowledged and recognised earlier because, during a period of increased pressure on Italy’s public debt, it would have highlighted the pitfalls and induced to admit that the financial system was not solid. The potential consequences would have been huge, taking the country under the Troika’s control as in the case of Greece, Ireland and Portugal. The government officials hoped that the situation would improve, but due to the second recession triggered by credit crunch, it worsened. The Italian government is negotiating a deal with the EU for a more flexible application of state aid rules to inject €40bn into banks. Is

getting the green light from Brussels a viable solution for the long term or is a strong bad bank needed as the last resort? Yes, state intervention is necessary at this point. Postponing the creation of a bad bank for years has made the problem even bigger to the extent of becoming a systemic issue for the country. Strengthening the bad bank (Atlante) and recapitalising many of the largest lenders is the only way forward. IFM editor@ifinancemag.com

OPINION INVESTMENT BANKING

OPINION

Dirk Schoenmaker

Charles Goodhart

US banks are gaining AN

edge

They are about to surpass their European counterparts in the European investment banking market

International Finance Magazine Oct - Dec 2016

OPINION INVESTMENT BANKING

he European banking system is downsizing. As a consequence, the big US investment banks are on the rise in Europe. This article argues that US investment banks are about to surpass their European counterparts in the European investment banking market. We discuss why leaving global investment banking to the big five American banks might be problematic and offer recommendations for a policy response. 1. Introduction Europe’s banks are in retreat from playing a global investment banking role.

It is a consequence of the regulatory impositions of recent years, notably of the ring-fencing requirements of the Vickers Report (2011) and the ban on proprietary trading by Liikanen (2012). The main concern has been that a medium-sized European country, such as the United Kingdom or Switzerland, or even a larger country like Germany, would find a global investment bank to be too large and too dangerous to support, should it get into trouble. So, one of the intentions of the new set of regulations was to rein back the scale of European investment banking to a more supportable level.

The European Union, of course, has a much larger scale than its individual member countries. If the key issue is the relative scale of the global (investment) bank and state that might have to support it, could a Europe-based global investment bank be possible? We doubt it, primarily because the EU is not a state. It does not have sufficient fiscal competence. Even with the European banking union and European Stability Mechanism, the limits to the mutualisation of losses mean that the bulk of the losses would still fall on the home country. Moreover, there would be intense rivalry over which country should be its home country, and concerns about state aid and the establishment of a monopolistic institution. While the further unification of the euro area might, in due course, allow a Europe-based global investment bank to emerge endogenously, we do not expect it over the next halfdecade or so. So the withdrawal of European banks from a global investment banking role is likely to continue. That will leave the five US ‘bulge-bracket’ banks, (Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup and Bank of America Merrill Lynch) as the sole global investment banks left standing. That leaves the European and Asian banks in the second tier, as strong regional players. Examples are Deutsche Bank, Barclays and Rothschild in Europe and CITIC in the Asia-

Pacific region. HSBC is in between, with both European and Asia-Pacific roots. 2. The rise of US and decline of European investment banks While the US investment banks are the global leaders, what is their share in the European investment banking market? In a new paper (Goodhart and Schoenmaker, 2016), we use the Thomson Reuters investment bank league tables to calculate the investment banking proceeds of the top 20 players (see, for example, Thomson Reuters, 2016). Figure 1 shows that the market share of EU and Swiss investment banks has declined since 2010/11, while the share of US investment banks (the big five and Lazards) increased from 35 percent in 2011 to 45 percent in 2015. If the trend were to continue, US investment banks would take the prime spot from their EU counterparts soon, possibly already in 2016. 3. Concerns for Europe Why should it matter if in all the European countries, the local banks’ investment banking roles retrench to a more limited local role? There are three arguments why leaving global investment banking to the big five American banks might be problematic. The first is that this could leave Europe at greater risk from possibly ill-advised American political or regulatory intervention. A case in point is in the

Oct - Dec 2016 International Finance Magazine

OPINION INVESTMENT BANKING

Investment banks by origin, European market shares (%)

60 50 40 30 20

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Swiss

Japan

Source: Goodhart and Schoenmaker (2016)

last crisis, when US banks came under pressure to reduce their foreign (including European) assets. While this danger exists, it was already present before the withdrawal of European banks from global investment banking. Since the US dollar and US financial markets play the central role in the financial system, the US is in a position to enforce its demands on acceptable counterparty transactions and to dominate, for good or ill, the international monetary policy scene. The second argument is that this will leave global investment banking much more concentrated. Is this

not potentially dangerous? Perhaps, but the five American investment banks still compete quite ferociously, so margins are not rising all that much. Finally, the third argument is that current developments are inducing European banks more and more to concentrate on their national roles and clients in their investment banking operations, rather than taking a wider European stance. Deutsche Bank and Barclays are the only Europeans left in the top seven for the European market. But they are likely to lose their positions, because Deutsche Bank is currently undergoing a

International Finance Magazine Oct - Dec 2016

major reorganisation and Barclays is in the process of executing the Vickers split. In the investment banking field, the only pan-European banks will all soon be American. There are concerns about US dominance in European investment banking. These are related to information advantages and soft relationships. The question arises whether US investment banks, as outsiders, are sufficiently knowledgeable about European corporates. Moreover, what is the loyalty of these US banks to European corporates in times of distress?

4. Policy response The European banking system is downsizing, partly because of on-going problems, partly because Europe is overbanked (Langfield and Pagano, 2016). That should run its course. The consequence is that the big US investment banks will be the sole leaders in the global investment banking market, as the Europeans, including the Swiss, are in retreat. Thus, the big five Americans are getting into pole position in the European investment banking market. What should be the policy response? First, we look at the political side. With the decline of European

OPINION INVESTMENT BANKING

banking (both in general and specifically investment banking), Europe’s hand in the EU-US Regulatory Dialogue is diminishing. Nevertheless, the European Commission is advised to strengthen its position in the EU-US bilateral negotiations and keep on viewing its banking industry as a strategic sector. The emerging role of the European Central Bank (ECB), on both the monetary and supervisory sides, can be used in these negotiations. The European Commission and the ECB should therefore jointly develop a strategic agenda with European priorities for their dealings with the US authorities. As in the US, this strategic agenda should be discussed with, and supported by, the industry. Second, we turn to

the supervisory side. While Europe may lose some political clout, the supervisory implications are not a problem for Europe. With the move to capital markets union, the European supervisory architecture can handle the gatekeepers, which are becoming more USdominated. The European Securities and Markets Authority (ESMA) has powers under the Regulation on Credit Rating Agencies to licence and supervise the European operations of the primarily US-based credit rating agencies. Similarly, the relevant directives (Capital Requirements Directive and Markets in Financial Instruments Directive) give the relevant supervisors in Europe (in this case the Prudential Regulatory

Authority and the Financial Conduct Authority in the UK) powers over the London-based European operations of the US investment banks. After Brexit, the US investment banks might move (part of) their business to Frankfurt and Paris. In that case, the ECB – the new supervisor in the banking union – would become the supervisor of these continental European operations. Third, the large corporates could themselves take precautions. For the bigger financing operations, a corporate typically hires a banking syndicate, which is a group of investment banks that jointly underwrite and distribute a new security offering, or jointly lend money to the corporate. European corporates would be well advised to

include at least one (large) European investment bank in this syndicate, also in good times when they do not need them. That could help them in bad times, when US banks might be reluctant for whatever reason (including more detached decision-making). The involvement of a (local) European investment bank in the syndicate is not only useful for loyalty but also information reasons. Because of their local roots, the European banks have an information advantage over their US peers, which keep offices in New York and London (and after Brexit, Frankfurt or Paris). The practice of giving a European investment bank at least one place in further US-dominated banking syndicates could help to avoid complete dependence on the whims of the big US investment banks. IFM editor@ifinancemag.com

Dirk Schoenmaker is Professor of Banking and Finance at Rotterdam School of Management, Erasmus University and Charles Goodhart is Emeritus Professor of Banking and Finance at London School of Economics

References Goodhart, C. and D. Schoenmaker (2016), ‘The United States dominates global investment banking: Does it matter for Europe?’, Policy Contribution 2016/06, Bruegel. Langfield, S. and M. Pagano (2016) ‘Bank bias in Europe: effects on systemic risk and growth’, Economic Policy 31(85): 51-106. Liikanen Report (2012) High-level Expert Group on Reforming the Structure of the EU Banking Sector, Final Report, Brussels. Thomson Reuters (2016) ‘Global Investment Banking Review, Full Year 2015’, Thomson Reuters Deals Business Intelligence, New York. Vickers Report (2011) Final Report: Recommendations, Independent Commission on Banking, London.

Oct - Dec 2016 International Finance Magazine

OPINION

James Blake

Modernise

credit checks International Finance Magazine Oct - Dec 2016

How advanced data analytics empowers banks to better service customers

OPINION

recent study by the Financial Conduct Authority (FCA) found that banks were turning away or closing the accounts of customers deemed to be high risk, which includes foreign nationals and students. It reported that two large British banks are closing around 1,000 personal accounts a month to curb these risks. However, the FCA has warned that banks could fall foul of competition law if they refuse new business or close accounts without good reason. But at Hello Soda, we believe that banks could be turning customers away unnecessarily because their practices are antiquated and not giving them reliable, accurate risk assessments. Traditional data sources, such as credit checks, are not sufficient for modern banking. There has been a significant rise in the number of thin credit files – that is, consumers without a credit footprint. Traditional credit scoring methods rate

the lack of a consumer’s credit history as high risk – even though they may be more responsible and reliable than those deemed as low risk. The root of the problem The problem is that credit scoring techniques are becoming increasingly archaic and leaving banks unable to service both existing and potential customers. Traditional ID verification techniques fall down for the 9.5 million consumers who don’t have a passport or a driving licence – that’s 17% of the population. Consumers with no permanent address or who move often can also be flagged as high risk and therefore have problem opening bank accounts and accessing credit – which particularly affects members of the armed forces and students or even those who have travelled a lot and lived abroad. All financial services firms have a responsibility to treat customers fairly. We believe that banks turning away consumers

verges on breaching Treating Customer’s Fairly regulations particularly as there are now effective pioneering methods of being able to credit assess consumers through big data analytics. Stepping into the light The implementation of big data analytics can enable individuals who are traditionally viewed as high risk to access credit – potentially for the first time. Individuals who could benefit include young people without a long-standing credit history who are struggling to buy their first home and foreign immigrants unable to transfer credit history between countries. We’ve already seen this have a big impact in the ability to verify ID and increase loan accepts. Our claims are evidenced through our recent study published with Visa Europe Collab. The research reveals how online social footprints can be used to boost financial inclusion, detect fraud, enhance contactless

and e-commerce and enable more targeted marketing – all on a consent-only basis. The results demonstrated that utilising social media data can benefit both consumers and businesses. Pioneering new ways to verify ID By applying advanced data analytics, natural language processing, the big five personality traits and other psycholinguistic profiling techniques to people’s social media interactions, the study identified that these methods could create a new, effective way to verify consumer identity and widen access to financial products. ID verification through pioneering social data analytics is particularly revolutionary for some developing countries where large portions of the population have been excluded from traditional financial services or may not have official identity documents. According to our study and the results we see each day through our business, social data driven services could also increase addressable markets for lenders through the introduction of alternative methods of risk assessment for individual borrowers. Implementation of this type of analysis could enable individuals who are not able to provide adequate assurance to lenders through traditional data sources such as credit checks. Tackling debt And when it comes to

Oct - Dec 2016 International Finance Magazine

OPINION

The problem is that credit scoring techniques are becoming increasingly archaic and are leaving banks unable to service both existing and potential customers

debt, the study found that by combining social data and financial history, consumers could actually be protected from overspending. Information around planned expenditure, trends in financial consumption and upcoming expensive events, such as birthdays or weddings, are all available through the convergence of social and financial data and by integrating analysis of this information into banking and payment applications, real time preventative measures, which protect consumer credit ratings and lower lending risks for banks could become a reality. For a student with a loan that is due to last an academic term, social and financial data could combine to provide individuals with

accurate real time monthly expenditure projections intervening with warning messages when spending behaviour is likely to be unsustainable. The research also highlighted the possibility of preventing fraudulent financial transactions before they take place. For banks and e-commerce merchants, the challenge is to accept as many good payments while avoiding fraudulent ones, and with the use of social identity verification it’s possible they can authenticate transactions more accurately and enhance their existing fraud detection capabilities by tapping into social data. Getting personal In addition, the possibilities for greater and more accurate

personalisation and targeted marketing campaigns were also identified in the research paper and, with the intelligent application of big data analytics, this could potentially increase engagement and up-take in financial services products and services. Currently, due to the vast amount of unwanted and irrelevant offers, the average clickthrough rate in the industry globally is just 3% but personalised and relevant targeting could see this rise significantly. Revolutionising the industry The FinTech revolution is creating opportunities for the industry to innovate and take major steps forward – for individual businesses and the sector as a whole. The FCA report highlights that consumers’ ability to

access financial services helps to improve market integrity, drive competition and promote financial stability and economic growth. However, as it stands, potentially millions of UK consumers cannot use the services that would help them meet their needs and play a wider role in financial markets and the economy. It’s understandable that banks can’t make meaningful decisions, such as loan acceptances or even something as fundamental as verifying identification, if the data isn’t available through traditional routes. However, this is where big data steps in to fill the breach, and as financial institutions begin to utilise it, we’re starting to see a revolution. We are making groundbreaking discoveries each and every day through big data analytics and what’s exciting is that as an industry, we’re only just scratching the surface. Big data has far-reaching possibilities in its ability to positively impact both the consumer and businesses. IFM editor@ifinancemag.com

James Blake is the founder and CEO of big data analytics firm Hello Soda

International Finance Magazine Oct - Dec 2016

OPINION

Ashok Vaswani

Delivering the UK’s 94

digital future

Innovation and productivity are at stake as the digital skills gap is estimated to be costing the UK economy £63bn a year in lost GDP

s the digital revolution strides forward, there’s no denying it is transforming the way we live and work. When I want to speak to my family in another country, I no longer write a letter or pick up the phone, I ‘Facetime’ them. If I want to pay my electricity bill, I no longer write a cheque but open up my smartphone banking app. New

developments in technology have revolutionised our interactions, but I find myself asking whether we can confidently say as individuals, businesses and as a society that everyone is making the most of these opportunities. Right now, here in the UK, a ‘digital skills crisis’ is looming and without concerted investment in digital skills development at all levels of society, we

International Finance Magazine Oct - Dec 2016

may face falling behind. The result? Innovation and productivity are at stake as the digital skills gap is estimated to be costing the UK economy £63bn a year in lost GDP.1 The nation’s focus on fast-growth, fin-tech startups, reliance on younger digitally-savvy employees, and complacent satisfaction with a basic level of digital inclusion risks creating a gap that leaves behind those

just ‘getting by’ online but lacking the know-how and self-assurance to thrive in this new era. As a business leader, it can be easy to overlook the need to nurture a broad range of evolving digital skills amongst your employees. Your business may seem to be ‘getting by’ in the new age of digital, but the truth is that the majority of UK enterprises are unprepared

OPINION

for the opportunities and challenges that the digital revolution brings. As a nation, we need to set our sights beyond the basic concept of Digital Inclusion and challenge ourselves to become fully Digitally Empowered. By this, I mean the digitally excluded become included, the included become enabled, and the enabled are able to continually unlock the potential of a rapidly evolving tech landscape. With this as our aim, and with the support of a wide range of contributors from the business, technology and scale-up sectors, we have launched The Barclays Digital Development Index. The index seeks to understand how ready the UK workforce is for the digital economy compared with its international rivals. Digital readiness is a global, economic race and we need to know where we stand to be able to develop and

1 2

succeed. The picture for the UK The good news is that the UK is performing well in terms of policies to encourage digital upskilling. However, when it comes to individuals’ assessment of their own skills, the UK trails major economic rivals India, China and the USA, coming in sixth place overall. It is an altogether different picture for business investment; the UK falls behind in seventh place for vocational and workplace skills. While almost half (47%) of all UK businesses recognise that better digital skills would lead to a more productive workforce, annual investment in digital upskilling remains minimal at only £109 per employee.2 Moreover, only 38% of UK workers interviewed said that their employer offers training in digital skills; far

lower than our economic competitors China, the US (48% in both) and India (67%).The two leading countries in the index, Estonia and South Korea, are particularly strong on vocational and workplace digital skills, proving that policy is not enough on its own to tackle the skills crisis and highlighting the important role the workplace and businesses have to play. Perhaps the most concerning indicator is the fact that the UK ranks just seventh out of 10 for coding skills and content creation. This is a key indicator of the ability to be a ‘digital creator’ rather than just a ‘digital consumer’, posing questions about what impact this will have on the UK’s readiness to compete in the future digital economy. While coding appears to be gaining credence in the UK curriculum, we must

http://www.publications.parliament.uk/pa/cm201617/cmselect/cmsctech/270/270.pdf Survey conducted for Barclays by Opinium Research in February 2016

continue the momentum behind developing these skills which are no longer skills of the future, but skills required in the here and now. India dominates the category for coding and content creation, producing almost 10 times as many school children with coding skills as the US; to ensure our workforce measures up to these emerging digital tigers, we must foster these skills from an early age. Why now? Digital policy in the UK is at a critical moment, with the Government’s Digital Strategy expected in the coming months and the UK navigating its future outside of the European Union, the focus – more so than ever – is on ensuring the UK’s global competitiveness in the new digital economy. Individuals, businesses and government must coordinate to safeguard the UK’s position as a powerhouse of tech innovation. But, while ‘Brexit’ continues to dominate headlines, we have to remember that the race to become the most digitally savvy economy is global and not confined to Europe. It is a race that will define how successful and prosperous we are for decades to come. IFM editor@ifinancemag.com

Ashok Vaswani is CEO of Barclays UK Do Read: The Barclays Digital Development Index https://digitalindex.barclays/

Oct - Dec 2016 International Finance Magazine

Noble philosophy driving success in business TH Group chairperson Madame Thai Huong is winning laurels for revolutionising the dairy sector of Vietnam

International Finance Magazine Oct - Dec 2016

The TH farm in Nghe An Province, Vietnam. India-based Asia Book of Records recognises it as the biggest hi-tech cow raising facility in Asia.

fter nearly 20 years in the banking sector, North Asia Commercial Joint Stock Bank (BAC A BANK) CEO Thai Huong diversified into the dairy industry in 2008. At that time she declared, “I want to make the best fresh dairy products for Vietnamese children.” By the end of 2010, she had turned a waste land in Nghe An to a huge modern dairy farm with 6,000 breeding cows. As of 2015, it was the biggest cluster of dairy farms in Asia with

45,000 cows. With breakthrough thinking, Madame Thai Huong chose a completely different direction for BAC A BANK, which moved from investing in real estate and securities to focus on hi-tech agriculture. The chairperson of TH Group says, “The decision came from my heart. On one hand, we operate as a commercial bank with capital mobilisation, lending and other services. At the same time, we offer consulting and investment. In particular, we focus on

sustainable development, on human benefits, environment-friendly, and combine Vietnamese elements (intellectual and natural resources) with world-class technology. That is the way we make a difference.” When she turned entrepreneur in the early 1990s, she had a desire to do something useful for the community. After nearly 20 years of counselling, she understood that while 70% of the Vietnamese are associated with agriculture, the country has abundant

To be the victor is not difficult; keeping the nobility in success is perfect Madame Thai Huong, chairperson, TH Group

Oct - Dec 2016 International Finance Magazine

The TH dairy plant in Nghe An province, Vietnam

natural resources and agricultural products contribute substantially to the economy, there is no large-scale project in the sector. If she succeeded in offering fresh and nutritious milk of international standards, it would have a significant impact on the country. Also, it was a practical way of improving the physical and mental ability of the Vietnamese, as well as contribute to reducing the trade deficit for the country’s dairy industry. That’s how TH true MILK

was born. The total investment of up to $1.2 billion covers raw material, setting up food factories, dairy farms and processing plants, which would be Southeast Asia’s largest complex, and a national distribution system. TH true MILK has won the trust of Vietnamese consumers and also earned various international awards. At its first appearance at the International Food Exhibition in Russia in May

2015, TH true MILK won seven awards (3 gold, 3 silver, one bronze). In early 2016, TH true Milk beat 237 competitors to win three prizes at the International Fair Gulfood 2016 in Dubai. Madame Thai Huong was honoured with the Individual Outstanding Achievement Award for her significant contribution to the transformation of the Vietnamese dairy industry. On May 18, 2016, the TH Group started construction of a complex for dairy and

milk processing (Phase 1) in Russia with a total investment of $2.7 billion. This is the first project involving a Vietnamese investor in Russia, and also the largest in terms of scale in this sector. Organic and fresh food Thai Huong’s ambition does not stop at the dairy market. She is now focusing on the fresh food sector, organic vegetables, healthcare and education. Under her leadership,

By the end of 2010, she had turned a waste land in Nghe An to a huge modern dairy farm with 6,000 breeding cows. As of 2015, it was the biggest cluster of dairy farms in Asia with 45,000 cows International Finance Magazine Oct - Dec 2016

and fruits, and serve tens of thousands of meals for families in Vietnam every day. The TH School System As another ambitious vision from Madame Thai Huong is the TH School System. The first school begins in Autumn 2016 by enrolling students from the age of two up to high-school. It will apply the English high-standard model in combination with Vietnamese school programs (in history, geography and literature). TH School students can expect world-class education as well as nutritious meals every day. Each student will be monitored carefully to ensure the appropriate method of education and nutrition.

Madame Thai Huong, chairperson, TH Group

BAC A BANK has advised investors about the clean and pure natural flavors of TH Pharmaceutical JSC (TH Herbals). Within two years of commencing operations in June 2013, the first product of TH Herbals appeared in the US - the most demanding market in the world. US consumers have warmly welcomed five product lines under the brand name of Total Happiness Naturals. It was named Best Product of February 2015 by Beverage

Industry Magazine. They were also featured on Drink Spotlight on TrendMonitor website. Natural essence of vegetables and flowers BAC A BANK, under the guidelines laid down by Madame Thai Huong, also invests in growing and exporting organic vegetable and fresh flower (FVF). This eco-sustainable project not only actively contributes to preserving and protecting the natural environment,

but also pioneers high-tech agriculture. The highlight is organic farming as per European standards (EC 834/2007) and that of the United States (USDANOP). Each product has a certification of commitment to quality and to offer a natural product. After the launch in 2013, products under the brand name of FVF have gradually become popular with Vietnamese consumers. Currently, FVF offers more than 100 kinds of vegetables

Balancing business and service Select a different path and set goals for sustainable development is the key goal set by Madame Thai Huong to ensure that her business interests bring in benefits for the local communities. This harmony has brought laurels to BAC A BANK and the TH Group, which under her leadership have won many awards, both national and international. Among other honours, Madame Thai Huong was included by Forbes magazine’s list of Asia’s 50 Power Businesswomen in the years 2015 and 2016. IFM editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

Country Focus: Iran

Matching expectations WITH

reality

So far, the gold rush of deals has not happened due to complicated regulatory systems Suparna Goswami Bhattacharya

100

International Finance Magazine Oct - Dec 2016

Country Focus: Iran

f there is one country which businesses around the world are looking to enter, it has to be Iran. Touted as a once-in-a-generation opportunity, it is probably the biggest market to open up to the global economy in decades. Sanctions had shut an oil-rich economy worth $400 billion from businesses. Though US primary sanctions and restrictions on any Iranian person or entity from conducting a transaction in USD continue, other countries are battling to crack a deal

with the Iranians. But most are realising that Iran is no cakewalk. As much as the Iranian government is trying to attract foreign direct investment, the fact remains that the country is yet to reform its age-old laws and regulations that are no longer relevant in the postsanctions era. Legal experts around the world are not surprised. Azadeh Meskarian, solicitor, Zaiwalla and Co LLP, says, “I consider such hurdles would be expected in case of any emerging market and Iran is no exception.

Although all EU based nuclear related sanctions were lifted under the terms of the Joint Comprehensive Plan of Action (JCPOA) as of the implementation day in January 2016, many political, legal and regulatory obstacles remain in attracting foreign investors into the country.” Among these are the sanctions imposed by the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury and sanctions related to Human Rights and Terrorism Financing allegations against Iran.

Under the JCPOA, the US president retains significant legislative authority to act on Iran’s internal matters, including censorship, surveillance, Internet monitoring, and other human rights abuses directed at its own people. These provisions authorise the president to impose targeted sanctions – such as visa restrictions and asset freezes – on Iranian individuals and entities. An important concern for foreign investors is knowing exactly who they are dealing with in Iran. “One has to ensure that the local partner

101

Oct - Dec 2016 International Finance Magazine

Country Focus: Iran

Maryam Taghavi, senior consultant, Atieh Bahar Consulting, a member of Atieh Group

102

is not connected to entities and individuals who are still on the sanctions list,” says Meskarian. For instance, the Iran Revolutionary Guard Corporation wields influence in many sectors. Hence, it is important for foreign players to take the help of local qualified experts to do a thorough background check. And, Iran does not allow trade with Israel-owned businesses. Red tape Complicated bureaucracy is an additional burden. Foreign companies are finding it difficult to understand and adjust to the ‘different’ ways of doing business in Iran. Maryam Taghavi, senior consultant, Atieh Bahar Consulting, a member of Atieh Group, feels the tangled network of governmental and semigovernmental entities makes it hard for foreign players to come to grips with facts pertaining to the market and its immense potential.

For example, foreign nationals need a work permit to establish their businesses. But for obtaining a work permit, a person is required to not leave Iran for a month. Real estate agencies have started seeking work permits in case foreigners need to rent a place. “This causes headaches for a foreigner who has just entered Iran and needs a place to stay, or to set up an office,” says Taghavi. But there are claims that the visa process has been speeded up. Fixers are everywhere, but finding one with the right expertise is not easy. “Many Iranians have launched companies claiming to offer consultancy services,” says Taghavi, adding that it will take years to really understand the underlying and determining factors of Iran’s markets and trends. One has to develop a reliable network of experts in various layers of the government and industries.

International Finance Magazine Oct - Dec 2016

Kunal Fabiani, business development manager, Healy Consultants Group, agrees that excessive due diligence is essential. “Clients must request invoices of the local companies and references to ascertain their worth. Without companies physically relocating to Iran to verify if they are bonafide, the best policy may be to work with non-Iranian companies, which already have existing business links with Iranian companies,” he says. Legal pitfalls Traditional European trade partners, such as Germany, Italy and France, have recent experience of Iran’s business peculiarities but other investors have no idea where to start and who to deal with. Labour laws and equality regulations are different. Furthermore, careful consideration needs to be given both to the choice of law and the means by which disputes are resolved in any contract

“

I consider such hurdles would be expected in case of any emerging market and Iran is no exception. Although all EU based nuclear related sanctions were lifted under the terms of the Joint Comprehensive Plan of Action (JCPOA) as of the implementation day in January 2016, many political, legal and regulatory obstacles remain in attracting foreign investors into the country Azadeh Meskarian, solicitor, Zaiwalla and Co LLP

Country Focus: Iran

being entered into. For instance, under Iranian conflict of law principles, the law governing the contract is the place of execution. Hence, any contract signed within the jurisdiction of Iran is governed by Iranian law and careful consideration needs to be given to the parties’ obligations prior to formalising business relationships. A chief executive of a UK-based FMCG company says his firm plans to enter Iran by next year but so far has not been able to gather enough confidence. “We plan to tie up with local companies to expand our footprint in the country. Though the ministries in Iran have always responded to our queries, I feel there is an air of suspicion,” says the CEO. Existing trade partners, like China, are facing a different set of problems. It was one of the few countries to trade with Iran

despite the sanctions. In March 2016, US authorities commenced an investigation into whether one of China’s largest telecommunications equipment makers violated US controls by selling American hardware and software to Telecommunication Co. of Iran, dating back to 2012. Technically, Iran might still be some time away from overhauling its regulatory system. However, positive steps have been taken to attract investment. For instance, the proposed Iran Petroleum Contract (IPC) covers different stages of exploration, development and production and will be offered to contractors as an integrated package for an estimated duration of 15 to 20 years. It replaces the unattractive buyback deals. As per the buyback contracts, foreign companies get very limited returns on investment and were denied any right to the oil; the bulk of the

profit went to the Iranian government. “How much time Iran will take to reform its system is difficult to predict. As foreign investors queue up, the impetus on regulation overhaul will be high. Realistically, it may still take a couple of years to create an acceptable regime for foreign investment,” says Fabiani. IFM editor@ifinancemag.com

Clients must request invoices of the local companies and references to ascertain their worth. Without companies physically relocating to Iran to verify if they are bonafide, the best policy may be to work with non-Iranian companies, which already have existing business links with Iranian companies Kunal Fabiani, business development manager, Healy Consultants Group

Oct - Dec 2016 International Finance Magazine

103

OPINION OPINION: Iran

OPINION

Azadeh Meskarian

Hurdles for

Iran

104

MoUs with foreign investors will not progress due to inadequate banking channels and legal pitfalls

t is now a year on since the historic Joint Comprehensive Plan of Action (JCPOA) between Iran and E3/EU+3. Although both the Iranian and the Western side of the deal have stood by their obligations, there remain serious concerns on the Iranian side as to overall economic and practical achievements of the JCPOA for Iranâ&#x20AC;&#x2122;s young and highly educated population. Failure of practical relief may call into question the effectiveness of the JCPOA and the practical removal

of such widely imposed restrictive measures. Although significant positive steps and measures have been implemented by both sides, and Iran offers tremendous opportunities in an unprecedented range of sectors, the rate of foreign investment into Iran has been lower than what Iran initially hoped for. Apart from the political concerns of the upcoming presidential elections in the US and Iran, there are various other domestic factors which should be considered by foreign

International Finance Magazine Oct - Dec 2016

OPINION OPINION: Iran

investors and could influence the attraction of direct foreign investment into Iran: Banking and financial channels Under the terms of the JCPOA, The Implementation Day on January 16, 2016 marked the effective lifting of the majority of restrictive EU measures and the US secondary sanctions (applicable to non-US persons and transactions taking place outside US jurisdiction). This was followed by detailed guidance from the OFAC of the Department of Treasury, in an attempt to ease the remaining concerns of foreign businesses to enter the Iranian market. However, banks and financial institutions remain hesitant to fully re-engage with Iran. While the deal was followed by historic delegations from various European countries leading

to MoUs in various sectors ranging from oil and gas to infrastructure, aviation and telecommunications, few if any transactions have progressed, nor will they have any realistic chance of survival without the reestablishment of adequate banking channels with Iran. There are strong deterrents for banks. The remaining US primary sanctions and USD restrictions prohibit any Iranian person or entity from conducting a transaction in USD, and the financial and reputational risks for banks remain significant. There are settlement agreements and deferred prosecutions between banks and US authorities by which many banks such as HSBC, Standard Chartered and BNP Paribas were subject to heavy fines (1.9bn for HSBC, $327mn for Standard Chartered and $8.9bn for BNP Paribas) as a result of breaching restrictions

on providing services to Iranian individuals and entities. Additionally, there is a concern that the Iranian banking sector lacks a sufficient regulatory framework, to ensure compliance with international money laundering and other standards. Due to the isolation of the market, appropriate legal and banking reforms and collaboration with Western service providers for training and education is needed to assist Iran in upgrading its domestic procedures to instil the necessary confidence in the market. Although Iran has implemented legal measures to combat money laundering and terrorist financing, the technical implementation may take longer and/or require significant support and assistance from Western service providers. In light of these positive steps taken by Iran, on

June 24, 2016, the FATF published a statement suspending for a year the counter-measures imposed against Iran and welcomed Iranâ&#x20AC;&#x2122;s adoption of, and high-level political commitment to address its strategic AML/CFT deficiencies, as well as Iranâ&#x20AC;&#x2122;s decision to seek technical assistance to implement the recommended Action Plan. While Iran remains on the FATF Public Statement during this one-year period, this is certainly a reflection of positive steps taken by Iran to increase transparency and update its regulatory, money laundering and anticorruption framework. This, in my opinion, is a helpful step towards attracting further foreign investment and sufficient engagement from banks and financial institutions to facilitate and process Iran related transactions. Furthermore, the Qeshm Investment and Development Co. has recently announced plans to establish a new financial centre to serve as a gateway for foreign businesses interested in entering the Iranian market. Further practical steps remain a necessity during this oneyear period by Iran to assist the return of sufficient confidence by foreign banks to re-engage with Iran. Due diligence Although the vast majority of nuclear related sanctions were effectively lifted as of the Implementation Day, over 200 entities and individuals remain subject to EU/

Oct - Dec 2016 International Finance Magazine

105

OPINION OPINION: Iran

confidence in this sector.

106

UK sanctions in addition to many more on the US SDN List. This includes the Iranian Revolutionary Guard Corp, which is estimated control between 25% and 40% of Iranâ&#x20AC;&#x2122;s GDP. Many businesses therefore correctly remain cautious not to inadvertently create trade relationships with a designated person or entity. However, establishing the beneficial ownership of privately owned or semi-governmental/ governmental entities is no easy task. The current regulatory framework, the complicated business structure and general ambiguity, which is particularly a concern when dealing with governmental and semi-governmental entities, all make conducting due diligence in Iran more complicated. The risks of getting this wrong are substantial and would expose foreign investors to legal challenges, fines and significant reputational risk. A lack of transparency and sufficient procedures is not unusual when it comes

to emerging markets, and it would be beneficial to introduce official reliable and independent domestic channels to assist foreign investors in this crucial step. Domestic regulatory framework Due to the isolation of the market, there is a pressing need for various areas of domestic Iranian law to be reviewed, and for foreign investors to obtain reliable advice on Iranian law before entering the market. Law firms in Iran are generally smaller than those with which Western businesses will be familiar, and there is no official guide or legal sector ranking services to assist market newcomers. Therefore, it is advisable to secure and conduct business through reliable contacts. Governing law Prior to formalising commercial relationships, careful consideration should be given to appropriate contractual choice of law and dispute resolution provisions. While Iranian

International Finance Magazine Oct - Dec 2016

law recognises the choice of a foreign law where one party is non-Iranian, according to domestic law, a contract will be considered to be governed by the law of its place of execution. There is therefore a risk that Iranian courts may not recognise foreign choice of law clauses in contracts physically signed in Iran. Dispute resolution While Iran is a signatory of the New York Convention 1958 and recognises agreements to arbitrate outside Iran, there is no transparent record of enforcement of arbitral awards by Iranian courts. Additionally, when dealing with state-owned or governmental entities, the non-Iranian party will require prior parliamentary authorisation before initiating arbitration. Due to concerns about the lack of transparency and the time consuming nature of the domestic legal system, it is essential that sufficient measures are adopted to create and develop further

Intellectual property In general, it is a straight forward procedure to register intellectual property rights in Iran, and highly advisable for foreign investors to do so, as the domestic law does not permit an unregistered owner to commence an action for infringement of IP rights. Although Iran is a signatory to the Paris Convention and a contracting state of all major treaties administered by WIPO, including the Madrid Agreement, the Madrid Protocol and the Patent Cooperation Treaty, foreign investors and IP rights holders will find it time consuming and frustrating to enforce those rights through the domestic courts. It is worth mentioning that Iran has not agreed to the Berne or the Rome Conventions. Therefore, there remains a lacuna in the domestic law, and there may also be significant inconsistencies between the Iranian domestic legal system and the scope of protections in international conventions. IFM editor@ifinancemag.com

Azadeh Meskarian is a solicitor at Zaiwalla and Co LLP

OPINION OPINION: Iran

OPINION

Ali Mirmohammad

108

International Finance Magazine Oct - Dec 2016

OPINION OPINION: Iran

Ways to tap Iranâ&#x20AC;&#x2122;s potential

Hire free capacity of SMEs and partner with KOEs to buy time to understand the market

109

Oct - Dec 2016 International Finance Magazine

OPINION OPINION: Iran

110

orldwide recession in oil and natural resources, obstacles on international banking transactions, credit rating, privatisation, heavy recession etc. are key factors that have slowed down the pace of investment in Iran. An annual investment of USD 150 billion reflects huge opportunities in large sectors such as Oil & Gas, Petrochemicals, Mining, Healthcare & Infrastructures. However, boost in key industries in Iran requires three to four yearsâ&#x20AC;&#x2122; time subject to a proper strategy and ease of doing business by the government. The Joint Comprehensive Plan of Action (JCPOA) of Iran has brought significant opportunities to boost foreign investment. A new route to enter the Iranian market could be to look at the untapped opportunities that are still not considered seriously. Tapping into free manufacturing capacities, partnering with Knowledge

Oriented Enterprises (KOE) and acquiring equity shares of active companies in special sectors can be a couple of immediate strategies to strengthen footprint in Iran with the lowest risk. Promotion of SMEs through foreign partnership is a key solution for the country to lift the economy from the current recession. The manufacturing sector is mainly dominated by SMEs (over 91%), where more than 70% of them

International Finance Magazine Oct - Dec 2016

are private. However, lack of liquidity, weakness in marketing & distribution strategies, obsolete technologies etc., has led to less than 50% utilisation rate. Development of foreign investment in this sector will not only help sustain the economy but also boost non-oil exports. The government plans to finance over USD 5.3 billion of 10,000 existing SMEs to upgrade their technology and, importantly, to complete about 2,000

under-construction projects with over 60% physical progress. This will bring a couple of opportunities for technology providers and foreign investors as well. Utilisation of free capacity by foreign parties is a key success factor, which offers many opportunities for global players. This will allow global players to utilise existing facilities and local skilled labour to manufacture low-cost products under their management. Global players can benefit from export incentives and some preferential tariff agreements to export their products out of Iran. Importantly, since the government is trying to cut the import of many products in line with a resistance economy through ongoing restrictions, hiring local capacities will allow International brands to acquire a good share of the domestic market in line with affordable sales prices. Most of the SMEs in Iran have at least 40% free capacities. For example, the

OPINION OPINION: Iran

through non-financial resources. Manufacturing new products with lowest R&D expenses and then benefitting from governmental support to come up as mass producers is a key opportunity in this sector. The overriding idea is looking at Iran in another way rather than only focus on key strategic projects. Attracting foreign investment in SMEs & KOE sectors will boost production capacity, export, R&D and, importantly, open up new markets and create many jobs. IFM editor@ifinancemag.com

installed capacity in Food & Beverage is over 96 million tonnes while the actual production is not more than 40 million tonnes. Other example can be the plastic industry where the install capacity is 15 million tonnes while actual production is close to 3 million tonnes. By utilisation of such capacities, the country can create at least 300,000 jobs without significant investment. The other opportunity for foreigners can be partnering with SMEs even with nonfinancial resources, such as technology, machinery &

equipment, management etc. Moreover, partnership in expansion plans, where 70% of the project has been already financed by the local bank, can be another option. Knowledge Oriented Enterprises Development of Knowledge Oriented Enterprises (KOEs) is another untapped opportunity Iran. The government aim is to generate over USD 500 billion GDP from medium & high technologies over the next decade. To reach this goal, development of KOEs

from less than 2,000 to over 16,000 is on agenda. The government has called for many incentives to boost KOEs in the country in order to not only create jobs for new graduates but also boost high technologies, such Nano Technology, Bio Technology, IT/ICT and robotics. Free/low-cost facilities, long-term loans with low interest rates, tax exemptions are a couple of incentives. International companies can opt for joint ventures, consider very small financial investments or even

111

Ali Mirmohammad is a Sr. Consultant & Business Development Manager for Frost & Sullivan in MENASA & Iran

The manufacturing sector is mainly dominated by SMEs (over 91%), where more than 70% of them are private. However, lack of liquidity, weakness in marketing & distribution strategies, obsolete technologies etc., has led to less than 50% utilisation rate Oct - Dec 2016 International Finance Magazine

Oil & Gas

Kenyaâ&#x20AC;&#x2122;s oil

fortune in limbo

Slump in global oil prices has slowed down exploration activities Amoxers Wachira

112

International Finance Magazine Oct - Dec 2016

Oil & Gas

n Lokichar, 550 kilometers north-east of Nairobi, a dusty village is basking in glory brought about by a recent oil boom. British oil prospecting firm Tullow Oil announced in 2012 that it had discovered oil in the larger Turkana region. This was just the beginning. In 2014, Tullow announced its seventh oil find in the region, estimating that the basin could have as much as one billion barrels of oil. Since then, the village as well as its residents have been living in the hope of a better and brighter future. Fortunes of the arid land, populated by nomadic pastoralists, have continued to rise over the years. Undoubtedly, the discovery unlocked vast business opportunities in the region as investors continue trooping into

the country. For instance, Kenya recorded growth in Foreign Direct Investments (FDI) according to a 2016 report by the United Nations Conference on Trade and Development (UNCTAD). In Lokichar, the opening of the South Sudan border, which opened up the region to business opportunities, as well as a small noncommercial airport are evidence of the regionâ&#x20AC;&#x2122;s transformation. Besides these, an oil pipeline connecting South Sudan and the port of Lamu on the Kenyan coast will pass through Lokichar. Dream in limbo In Kenya, oil is associated with riches and no one is more optimistic than the common man. It is easy to see why. Oil prices in the global market dictate the local cost of food

and commodities and by extension, inflation. When the country announced plans to start commercial production of oil by the end of 2016, the whole nation waited with baited breath. But that might be just a pipe dream. Plummeting crude oil prices in the global markets over the past few years have dealt a major blow to Kenyaâ&#x20AC;&#x2122;s oil prospects. Here is how. In July 2016, a barrel of crude oil was trading at $29. This is the first time it dropped below $30 since 2003 and 72 per cent lower than it was in March 2012 when Kenya announced it had struck oil. At the current crude prices, Kenya will be unable to extract oil, according to a Chicago based research and investment management firm, Morningstar Inc, which puts the breakeven price for oil from Lokichar

113

Nearly all the oil companies have restructured their assets and operations to reduce costs and preserve balance sheetsâ&#x20AC;&#x2122; integrity George Wachira, oil analyst

Oct - Dec 2016 International Finance Magazine

Oil & Gas

114

at about $50 per barrel. When the good news about the discovery of the precious commodity was made, crude oil was going for $111 a barrel. Oil analyst George Wachira says that the effects of falling oil prices are being felt in the local oil exploration scene, where many upstream investments, mainly in exploration and drilling, have either been reduced or postponed. “Nearly all the oil companies have restructured their assets and operations to reduce costs and preserve balance sheets’ integrity,” he says. Major investments that had started gaining traction are now losing steam, exposing the twists and turns that have since rocked the Kenyan oil sector. Industry analysts predict that the situation could get worse, at least in the next two years, before the affected firms

return to some measure of profitability. No appetite for investment Some explorers are leaving. UK’s Tower Resources, Afren Oil, Australia’s Pan continental Oil and Marathon Oil of the US have all exited Kenya due to a poor environment that makes it difficult to raise funds for exploration. Patrick Obath, a consultant in the energy sector, explains the recent developments, “The level of activity in the upstream sector at the moment is between 40 and 50 per cent. We expect to see a lot of negotiations between the government and exploration companies to extend commitments that had been made earlier due to lack of finances for their implementation.” Firms offering support services to the sector have also been hard hit.

International Finance Magazine Oct - Dec 2016

“With the prevailing oil prices, there is not much appetite for investment in projects such as pipelines by oil companies and other investors because of uncertain returns,” says James Mbote, chairman of Oil and Gas Contractors Association of Kenya. While the slump in oil prices is good news for Kenyans, who have enjoyed reduced fuel prices ever since the slump kicked in, it is bad news for a country dreaming to become a top oil producer. This turn of events is jeopardising Kenya’s plans for early production of oil. A case in point is the collapse of talks between Kenya and Uganda — also producing oil — regarding a joint $4 billion pipeline to transport oil to the port. As it stands, Kenya will now have to build its own pipeline to transport some 600 million barrels of oil from the Turkana oilfields to Lamu

The level of activity in the upstream sector at the moment is between 40 and 50 per cent. We expect to see a lot of negotiations between the government and exploration companies to extend commitments that had been made earlier due to lack of finances for their implementation Patrick Obath, consultant in the energy sector

Oil & Gas

In July 2016, a barrel of crude oil was trading at $29. This is the first time it dropped below $30 since 2003 and 72 per cent lower than it was in March 2012 when Kenya announced it had struck oil for export. This comes after Uganda struck a deal with French firm Total, which will see the pipeline run through Tanzania. In the short term, however, the government has said that it will transport crude exports through rail and road to Mombasa, but the full scale and long-term exports will be transported to Mombasa via the Turkana-Lamu pipeline. Regarding the competition between the two oil producing east African countries, Kenya and Uganda, oil expert

George Wachira says, “The next psychological contest is which pipeline (Lamu in Kenya or Tanga in Tanzania) shall dispatch the first barrel of crude oil into the international markets.” He says that the critical challenge for Kenya is to implement a timely pipeline project that results in competitive tariffs. This, coupled with the resurgence of crude oil prices, expected to stabilise by 2019, could revive the Kenyan oil dream. “As the global oil prices show signs of strengthening, the Kenya economic and fiscal planners should be

alert to a more stringent era characterised by higher cost of energy imports with negative impacts on foreign currency availability and inflation,” says Wachira. The industry is expected to rebound, probably post 2016. Wachira believes another boom can happen if investors in the Turkana oilfield and the Kenyan government are focused on having the crude production facilities and the crude export pipeline ready by 2019/20. IFM

115

editor@ifinancemag.com

With the prevailing oil prices, there is not much appetite for investment in projects such as pipelines by oil companies and other investors because of uncertain returns James Mbote, chairman of Oil and Gas Contractors Association of Kenya

Oct - Dec 2016 International Finance Magazine

E-Government

BAHRAIN LEADS IN

E-GOVERNMENT IN MIDDLE EAST

116

It is ranked 24th globally, followed by the UAE at 29th position Mohammed Ali Al-Anesi

ahrain ranks 24th globally in the latest United Nations Development Programme (UNDP) report on E-Government. Classified ‘very high’ in the E-Government Development Index (EGDI), it is the leader in the Middle East, followed by the United Arab Emirates, which is in the 29th position globally. The UAE is the only other country from the Middle East to be classified ‘very high’ in EGDI. The EGDI is a composite measure of three important dimensions of e-government, namely: provision of online services, telecommunication connectivity and human capacity. Those with ‘high’ EGDI are Kuwait, Saudi Arabia, Qatar, Oman, Turkey,

International Finance Magazine Oct - Dec 2016

Dr Farah N Gauri

Tunisia and Cyprus. In the ‘medium’ rung are Iraq, Lebanon and Jordon. Iran and Yemen are among those in the ‘low’ EGDI bracket. Bahrain had established a Supreme Committee for Information and Communication Technology (SCICT) and the e-Government Authority to provide direction in developing and implementing a comprehensive e-government strategy. Bahrain, UAE, Kuwait, Saudi Arabia and Qatar rank among the top 10 in Asia due to their high GDP, high literacy rates, small population and a keen desire by their respective governments to invest in and develop their online national portals, and offer their citizens advanced e-services

and information accessible in an effortless way. The online portals of these countries are linked to one another, allowing their citizens easier navigation and access. This new initiative is expected to stimulate the public sector to deliver more transparent and high-efficiency services, hence adopting a citizencentric approach with the needs of the citizen, as a client, in the forefront. 2030 Agenda E-government in its simplest form is about the use of Information & Communications Technologies (ICT) to provide access to government information and deliver public services to citizens and business partners.

E-Government

However, practitioners have still not figured out how to exploit its full benefits. The problem is with the difficulty in tangibly justifying the gigantic investments in ICT systems for the past decade and a half. In the Middle East, especially in GCC countries, e-government is part of the core vision to execute projects leading to implementation of the 2030 Agenda for Sustainable Development, which aims to advance people, planet, prosperity, peace and partnerships. Governments, together with the private sector and civil society, will play a central role in implementation of the Sustainable Development Goals (SDGs). They will need to drive the principles and goals of the 2030 Agenda through public institutions at the local,

national, regional and international levels. Achieving the SDGs will require developing and implementing e-government and innovation. Aims of the initiative Through innovation and e-government, public administrations around the world can be more efficient, provide better services and respond to demands for transparency and accountability. E-government can help governments go green and promote better natural resource management, stimulate economic growth and promote social inclusion, particularly of disadvantaged and vulnerable groups. ICTs have also proven to be effective platforms to facilitate knowledge sharing, skills development, transfer of innovative e-government solutions and capacity-

building for sustainable development. E-government can generate important benefits in the form of new employment, better health and education. E-government is a way for governments to achieve their objective to serve people better, including the poorest and the most vulnerable, and for people to be involved in the design and use of public services to ensure the well-being of all. Public institutions at all levels have the responsibility of translating the SDGs into national and local targets, strategies and plans to lift people out of poverty and provide opportunities for prosperity to all while protecting our planet. Access to quality public services, particularly for vulnerable groups, is essential for attainment of the SDGs, be it in the areas of education, health, sanitation, finance or

security. Universal and indivisible in nature, the 2030 Agenda calls for an integrated approach to development based on partnerships and the active participation of all stakeholders. New institutional set-ups and integrated coordination of government activities at all levels are needed to promote a holistic and participatory approach to public service delivery. Traditional principles of public administration, such as effectiveness, accountability and ethics, are taking renewed urgency, as is the need to gear all efforts towards servicing the people. The use of ICT in government can effectively support an integrated and inclusive implementation of the SDGs with poverty eradication as the overarching goal. E-government can provide the necessary tools

Number of countries grouped by E-Government Development Index (EGDI) levels, in 2014 and 2016 Survey 2014

Survey 2016

13% Very High EGDI: 25 countries

15% 38%

17%

Very High EGDI: 29 countries 16%

Middle EGDI 74 countries

Low EGDI 32 countries 32%

High EGDI 62 countries

35%

Middle EGDI 67 countries

Low EGDI: 32 countries 34%

High EGDI 65 countries

Oct - Dec 2016 International Finance Magazine

117

E-Government

118

to enable policy integration not only across economic, social and environmental dimensions but also among various sectors, subsectors and programmes. It can also offer opportunities to reengineer existing decisionmaking processes and information flows. It can help increase transparency and accountability as well as participation through open

government data. By providing online access to the information that the government generates and collects on a host of subject areas, people have greater insight into how governments operate and how public funds are spent. Data about public spending is also essential to ensure effective review of the implementation of

the SDGs. Participation of people in policy-making and in the design and delivery of services is essential to implementation of the 2030 Agenda. E-government can be a positive enabler of government transformation as long as it is used to support institutional systems that are legitimate, effective, transparent and

participatory. The SDGs provide a framework to orient efforts to advance e-government and keep them focused on the overarching objective to profoundly improve the lives of all people and improve our world for the better. IFM editor@ifinancemag.com

How E-Government works

he basic concept of e-government is delivering a service to the citizen rather than make him or her run around to different offices for that service. Letâ&#x20AC;&#x2122;s take the example of a person renewing his driving licence in Bahrain. The entire procedure from a request for

International Finance Magazine Oct - Dec 2016

renewal till receipt of the new licence is done online without the person having to visit the traffic department even once. Another interesting example is the way drivers are fined for exceeding the speed limit in Saudi Arabia. The driver instantly receives an SMS saying â&#x20AC;&#x2DC;you have been fined for over speedingâ&#x20AC;&#x2122;. The

person will not be allowed to leave the country until he pays the fine no matter how small the amount is. The government has simplified the process by facilitating payments through ATMs. Such steps contribute to economic, administrative and social benefits by saving time, effort and money.

E-Government

Countries grouped by E-Government Development Index (EGDI) levels in alphabetical order Very-HighEGDI (Greater than 0.75) Australia

High-EGDI (Between 0.50 and 0.75) Albania

Mauritius

Middle-EGDI (Between 0.25 and 0.50)

Low-EGDI (Less than 0.25)

Algeria

Lesotho

Afghanistan Benin Burkina Faso

Austria

Andorra

Mexico

Angola

Libyan Arab Jamahiriya

Bahrain

Argentina

Monaco

Antigua and Barbuda (-)

Maldives

Belgium

Armenia

Mongolia

Bangladesh

Marshall Islands

Burundi Central African Republic Chad

Canada

Azerbaijan

Montenegro

Belize

Micronesia (Federated States of)

Denmark

Bahamas (+)

Morocco

Bhutan

Namibia

Estonia

Barbados

Oman

Bolivia

Nauru

Comoros

Finland

Belarus

Peru

Botswana

Nepal (+)

Congo (-)

France

Bosnia and Herzegovina (+)

Philippines (+)

Cambodia

Nicaragua

CĂ´te d'Ivoire

Germany

Brazil

Poland

Cameroon

Nigeria

Democratic Republic of Congo

Iceland

Brunei Darus-salam

Portugal

Cape Verde

Pakistan

Djibouti

Ireland

Bulgaria

Qatar

Cuba

Palau

Equatorial Guinea

Chile

Republic of Moldova

DPR of Korea

Panama

Eritrea

Israel Italy

China

Romania

Dominica

Paraguay

Gambia

Japan

Colombia

Russian Federation

Dominican Republic

Rwanda

Guinea

Lithuania (+)

Costa Rica

Saint Kitts and Nevis (+)

Egypt (-)

Saint Lucia

Guinea-Bissau

Luxembourg

Croatia

San Marino

El Salvador

St Vincent & the Grenadines

Haiti

Netherlands

Cyprus

Saudi Arabia

Ethiopia

Samoa

Liberia

New Zealand

Czech Republic

Serbia

Fiji (-)

Senegal

Madagascar (-)

Norway

Ecuador

Seychelles

Gabon

Sudan

Malawi

Republic of Korea

Georgia

Slovakia

Ghana

Suriname

Mali

Singapore

Greece

South Africa (+)

Guatemala

Swaziland

Mauritania

Slovenia (+)

Grenada

Sri Lanka

Guyana

Syrian Arab Republic

Mozambique

Spain

Hungary

Thailand (+)

Honduras

Tajikistan

Myanmar

Sweden

Jordan

TFYR of Macedonia

India

Timor-Leste

Niger

Switzerland (+)

Kazakhstan

Trinidad and Tobago (+)

Indonesia

Togo (+)

Papua New Guinea

United Arab Emirates (+)

Kuwait

Tunisia

Iran (Islamic Republic of)

Tonga

Sao Tome and Principe

United Kingdom

Latvia

Turkey

Iraq

Turkmenistan

Sierra Leone

United States of America

Lebanon (+)

Ukraine

Jamaica

Tuvalu

Solomon Islands

Liechtenstein

Uruguay

Kenya

Uganda

Somalia South Sudan Yemen (-)

Australia

Malaysia

Uzbekistan (+)

Kiribati

United Republic of Tanzania

Malta

Venezuela

Kyrgyzstan

Vanuatu

Viet Nam (+)

Lao People's PR

Zambia (+) Zimbabwe

Note: Countries with superscript (+) have advanced from a lower EGDI group to a higher EGDI group (e.g., from low-EGDI to middle-EGDI); countries with superscript (-) have dropped from a higher EGDI group to a lower EGDI group (e.g. from high-EGDI to middle-EGDI). Oct - Dec 2016 International Finance Magazine

119

Faltering economy stirs labour discontent Though irregular and small in size, labour actions have not stopped in Egypt, which is grappling with rising prices and low wages Alessandra Bajec

n spite of the Abdel Fattah Al-Sisi regime’s persistent crackdown on all kinds of dissent, labour unrest continues in defiance of the 2013 law banning protests. The law was passed after the military-backed overthrow of President Mohamed Morsi. Egypt saw 493 industrial actions between January and April 2016 year amounting to an average of six actions every day, according to Egyptian NGO Democracy Meter. The same human rights group documented 1,117 strikes and protests across the country in 2015, with an average of three daily labour actions. Labour protests are typically driven by disputes over low wages and late payment of salaries, unpaid bonuses, grievances regarding lack of job security and poor working conditions. “Egypt has suffered from stagnation of growth for years, industrial and factory workers see their wages getting lower since decades, yet the government is doing nothing to counterbalance that,” said Omar Ghannam, Budget Programme Officer at the Egyptian Centre for Economic and Social Rights (ECESR). The budget officer pointed to

International Finance Magazine Oct - Dec 2016

Country Focus: Egypt

shock factors to the Egyptian market, such as the decline in purchasing power following gradual devaluation of the Egyptian pound against the US dollar, and the high increase in inflation rates due to lack of dollar availability since the 2011 uprising and subsequent political unrest that drove away foreign investors. Weakening currency In late July, the Egyptian currency hit a record low of LE13 per US dollar on parallel market, compared to the official rate of LE8.78. Earlier in March, the pound was devalued by about 14.5%. According to Mohamed Gad, economic journalist at Aswat Masriya, acute dollar shortage is hindering trade putting more pressure on the central bank to devalue the currency for the second time this year, and pushing prices up. Imported goods are consequently more expensive.

“All this is creating social pressure, of course. It’s hard to expect the situation will ease in the coming months unless these structural problems – slow growth and inflation – are fixed,” Gad commented. “Egypt has achieved political stability and security, but has not yet achieved economic stability,” former finance minister Ahmed Galal reportedly stated in a lenders’ conference in late July. The recent dollar crisis coupled with the plunge in the local currency aganst the dollar’s value have put a lot of strain on factories since much of Egypt’s imports comes from raw material for production, resulting in higher manufacturing costs, lesser production and slowdown. While many industrial sites are forced to close down or halt their activity, Ghannam explained, other plants have survived such disruption through cuts to

labour costs, essentially salary cuts where factory managers will face less resistance since workers are largely un-protected by their unions – mostly inefficient and controlled by the state – and harassed by security forces if they demonstrate. With prices continuing to rise and salaries staying the same, many Egyptian workers are pressing for very basic rights, like living wages, better conditions and safe workplaces. “Left alone fighting, workers resort to sit-ins, rallies, partial strikes, whatever they can to voice their demands,” the ECESR researcher noted. Stalled companies and faltering industries cutting down on wages have led to industrial actions nationwide in reaction to worsening work conditions and insufficient pay. Iron hand One noteworthy recent case comes from Alexandria. In late May, workers from

“

Egypt has suffered from stagnation of growth for years, industrial and factory workers see their wages getting lower since decades, yet the government is doing nothing to counterbalance that Omar Ghannam, Budget Programme Officer at the Egyptian Centre for Economic and Social Rights (ECESR)

Abdel Fattah al-Sisi; President of Egypt

Oct - Dec 2016 International Finance Magazine

121

Country Focus: Egypt

122

the Alexandria Shipyard Company held sit-ins at the port. Set up as a stateowned facility in the 1970s, the company was taken over by the Ministry of Defense in 2007. Mismanagement, reduced workload and deteriorated pay pushed most of the 2,500 employees to mobilise. Demands included payment of the national minimum wage (LE1,200 per month), annual Ramadan bonuses, overdue profit shares, health insurance. In addition, they called for the reoperation of stalled production lines and dismissal of the company’s chief administrator. In response, security forces clamped down on the sit-in and the workers’ demands were rejected. The company was shut without notice on May 24, ECESR lawyer Mohamed Awad recounted, with army units deployed to prevent employees from entering the workplace. 26 workers are standing military trial

on charges of striking and inciting strikes. The company’s administrators and military prosecutors accused the protesters of obstructing production, which in turn caused the lockout. However, Awad claimed the defendants had not engaged in any kind of work stoppage or anything that could have obstructed operations. Alexandria Shipyard administration, instead, halted operations as a result of the closure imposed by company authorities and military police. Suzanne Nada, Alexandria-based coordinator of ECESR workers’ unit, cited other labour battles. Old equipment is a drag Protests were organised between 2014 and 2015 by workers of Bolivar Spinning and Weaving Company and Vestia Company in Alexandria. Like other spinning and weaving companies around the

International Finance Magazine Oct - Dec 2016

country, they were made half state-owned and half privatised. Citing a financial crisis, the management pressured workers by delaying and cutting their salaries, stopping import of material, laying off a part of the workforce, with plans to sell the company’s land holdings. Nada observed that ever since the time of Anwar Sadat, a well-known government policy has been to make a large number of companies fully or semiprivatised, which has resulted in gains gradually going to the private investor, production losses for the former state-run company, pay cuts and dismissals. The company employer would not invest in new equipment, which in turn increases production costs, given that many factories in Egypt operate with high consumption old machinery, forcing the company to shut down. Instead, selling the company’s land is more

“

All this is creating social pressure, of course. It’s hard to expect the situation will ease in the coming months unless these structural problems – slow growth and inflation – are fixed Mohamed Gad, economic journalist at Aswat Masriya

Country Focus: Egypt

In late July, the Egyptian currency hit a record low of LE13 per US dollar on parallel market, compared to the official rate of LE8.78. Earlier in March, the pound was devalued by about 14.5% profitable as the investor would buy and resell the land for real estate at a much higher price. Over the years, the Egyptian state has thus proved to act in the interest of businessmen, not for its own benefit. Workers from the Nile Cotton Ginning Company were demonstrating in May-end in Cairo outside the Parliament building and cabinet headquarters. They held a round of labour actions in the last four years against unpaid wages and state failure to implement a court verdict that had invalidated the privatisation of their company in 2011, and ordered reopening of the company under state administration. Employees in the Endowments Ministry were striking in March outside its branch office in Giza, calling for improved wages and

working conditions. Many of the state-employed workers do not receive the minimum wage, some earn just half, several of them have invalid employment contracts, according to sources. Also in March, private transport company drivers went on an ongoing strike in Aswan over the termination of their licences by the governor. Aswan public sector street cleaners organised an extended strike seeking full-time contracts, as they are reportedly employed on part-time contracts, which deprive them of rights, including bonuses, the right to join trade unions, adequate insurance or pension plan. From Alexandria to Aswan, labour unrest continues in Egypt, primarily in public sector companies. The scale and

frequency of actions have clearly declined since adoption of the protest law. Nevertheless, workers continue to challenge legal restrictions, state repression and security clampdown for simply attempting to take their rights back. Unrest and causes By no means have these actions impacted the state of Egypt’s economy. After the 2011 revolution, a rhetoric that vilified workers for causing economic slowdown spread quickly in the local media, and dismissed labour demands as ‘sectorial’ or ‘narrow’ interests, detrimental to the country’s well-being. “It’s a broken narrative, strikes do not harm the Egyptian economy – it’s the opposite – they are the effect of deteriorating economy, not the cause,”

argued Ghannam. “The labour movement is not responsible for the economic crisis,” Gad said, “Egypt’s economy is shrinking because there is very little investment due to political instability and dollar crisis,” Gad affirmed. Today, there is less of that rhetoric from the political leadership or the business community. Rather, the authorities repress labour unrest with little talk about it, which one can notice from the decreased media coverage of workers’ actions. Therefore, because the topic is much less covered, the general impression is that it doesn’t exist. Company owners, for their part, accuse workers of being ineffective, stopping or delaying production with their strikes and sit-ins, and making companies fail. On the other hand, the very reasons for workers going on strike or protesting are not addressed, their demands go unheard. Instead, labour actions are handled with an iron hand. In some cases, negotiations will result in meeting some of the demands. But workers rarely get what they actually ask for. IFM editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

123

INSURANCE

Insuring

renewables Companies are working out hedging instruments with the longevity required by the sector

124

Tim Evershed

ast year was a record-setting one for a renewable energy market that continues to see new technologies coming on stream and growth in consumer demand. 2015 saw new renewable energy installations add an estimated 147 gigawatts globally, the largest increase ever. Renewables are now

International Finance Magazine Oct - Dec 2016

cost competitive with fossil fuels in many markets and usage milestones are being passed all the time. Cities, communities and companies are leading the rapidly expanding â&#x20AC;&#x2DC;100% renewableâ&#x20AC;&#x2122; movement, playing a vital role in advancing the global energy transition. However, renewable energy producers remain at the mercy of the elements

INSURANCE

to generate power, which has proved a stumbling block for investors. To date, the insurance industry has been unable to produce hedging instruments with the longevity required by the sector. That is changing though as new products are launched allowing renewable energy providers to hedge against a drop in the levels of wind or sunshine for longer periods. New products Allianz Risk Transfer (ART) has executed a 10-year Proxy Revenue Swap with Capital Power’s Bloom Wind Farm, to be constructed near Dodge City, Kansas. The risk management solution for hedging wind volume risks for wind farms has been developed by ART

in partnership with hedge fund Nephila Capital, along with energy specialists REsurety and Altenex. The 10-year agreement will secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 178 MW Bloom Wind Farm. “10-year revenue protection is something the market has not seen yet and is something that the market is getting excited about,” says Karsten Berlage, Managing Director of ART. “It’s important because finance people lending to long-term assets need 10 years. When the tenor of the financing is matched with the hedge, it becomes more effective. “That supply risk is the foundation of our product. We create a better financing

package by reducing that risk. If the wind, or the rain or the sunshine is insufficient, you can put Allianz into the equation and go back to your lender or capital provider and get much better terms. Those terms offset any cost on the hedge and creates a much more valuable project.” The structure, which is similar in concept to a tolling agreement or capacity payments, swaps the floating revenues of a wind farm – those driven by the hourly wind resource and power prices – for a fixed annual payment. “There are renewables markets around the world. We’ve done this in the US, but there’s no reason we couldn’t do this anywhere in the world,” says Berlage. Meanwhile, insurer Sciemus has launched an

125

10-year revenue protection is something the market has not seen yet and is something that the market is getting excited about Karsten Berlage, Managing Director of ART

Oct - Dec 2016 International Finance Magazine

INSURANCE

126

insurance policy to protect the owners of solar farms against a lack of sunlight. The policy pays out if levels of sunshine fall below an agreed amount - which thus reduces the output and revenue of the farm - and it is available as a hedging instrument for solar farm operators for up to 10 years. “The problem many solar farms face is that they secure debt financing at the P95 level, leaving a 5% chance that the Annual Energy Production will not be achieved,” says James Ingham, Head of

Renewables at Sciemus. “We know the weather can be variable, and if sunshine levels are less than expected, the output of the farm diminishes, yet the farm operators are obliged to pay back their bank debt.” The Sciemus product is also notable as it is one of the few standalone products aimed at solar farms. “In the past, if you wanted to buy a product like this, you would have to buy a Property Damage programme with that same underwriter. That inhibited

the ability to shop around and the broker, who is trying to put together the best overall programme for their client, is going to find it difficult if they’re tied to certain providers.” “We would rather work pro-actively with the overall finance for the project. The market is heading towards getting involved in the early stages of projects and advising clients from cradle to grave,” adds Ingham. It is this ability to match the needs of the investors to these hedge products that is significant.

Going beyond renewables Hedging products at Willis is not restricted to solar and wind production but applies to other areas of renewable generation as well. Roberts says, “The exact same products exist for

hydro but they’re a bit more complex because the relevant rain doesn’t necessarily fall on the power station itself but is usually in a remote catchment area somewhere up in the hills. You have to look

International Finance Magazine Oct - Dec 2016

at reservoir capacity and other factors. Ultimately, if there hasn’t been enough rain or snow, you may not have enough water to drive the turbines.”

Generally speaking, renewables need longterm transaction duration because of the underlying funding they receive, either equity or debt, and usually need to go out over at least 10 years. If you’re looking to de-risk a project to satisfy the lenders’ requirements, then a one-year policy really doesn’t do much Julian Roberts, Managing Director, Alternative Risk Transfer Solutions, Agribusiness & Weather at Willis

INSURANCE

Cities, communities and companies are leading the rapidly expanding ‘100% renewable’ movement, playing a vital role in advancing the global energy transition “Generally speaking, renewables need longterm transaction duration because of the underlying funding they receive, either equity or debt, and usually need to go out over at least 10 years. If you’re looking to de-risk a project to satisfy the lenders’ requirements, then a one-year policy really doesn’t do much,” says Julian Roberts, Managing Director, Alternative Risk Transfer Solutions, Agribusiness & Weather at Willis.

Subsidy over insurance Recently, Portugal ran on sustainably produced electricity alone for four consecutive days and these kind of markers are being recorded with increasing frequency as the renewable energy sector continues to grow. Solar power is experiencing growth across areas blessed with plenty of sunshine like the Middle East and North Africa as well as countries that have encouraged its use through regulation, such

as France and Germany. The sector has been slow to use insurance hedges and government subsidies is one reason why. Roberts says, “Although solar and wind products have been available for many years, the economics underlying them are changing. While tariff prices have been adequately high, most of these hedges haven’t really been needed, as they haven’t provided much value. “However, if the price regime reduces, you’re

far more exposed to low production. If over the lifetime of your project, the price you were expecting to receive is much lower than budgeted, the original project risk and economics are thrown into question. This could well spur interest in these products.” IFM editor@ifinancemag.com

Oct - Dec 2016 International Finance Magazine

Making branding budgets work 128

Companies spend anywhere between 1% and 30% of sales revenue on branding Peter Taberner

International Finance Magazine Oct - Dec 2016

Branding

he budgets that companies allocate for their branding portfolio is increasingly an important part of their business and in alignment with their marketing objectives. A plethora of options are now available for marketing a brand in the digital world. This hands businesses choices in how they allocate their branding costs to communicate with potential consumers. Echo Brand Design is a company that has wide experience of creating bespoke campaigns for major corporate names, including Cobra beer and Brylcreem. Jeremy Davies, head of marketing, explains, “As understanding of the brand’s value as an intangible asset has increased, brand building has become higher priority. Consumer products, from global brands like CocaCola to local brands such as Dorset Cereals and Nakd, use packaging design as the

primary expression of their brand design.” How much companies spend can vary widely, anywhere between 1% and 30% of sales revenue, he added. He also believed that corporate brands often value their brands just as highly. Although the brand may be less visible, design is still a crucial factor. A powerful brand identity system that can be flexed across numerous products or services can help to crosssell, or successfully launch into new business areas. He says, “Before deciding on a brand budget, the business should analyse its marketing objectives, identify where brand investments should be made, and set clear metrics to track Return On Investment.” Overall, metrics are crucial, and the ultimate goal of a company’s brand is to drive commercial success. As of now, there are so many variables and

channels of communication that brand-building activities must deliver business performance, prove their efficacy and not just add a few extra followers on social media. Echo are now using various technologies with their clients due to the rise of digital media, which has significantly changed the way the branding budgets are spent. TV advertising no longer stands alone and there are many examples how companies are using social media and digital technology. The famous Phil Collins and the gorilla playing the drums advert was initially released on You Tube by Cadbury’s. Packaging has become more interactive. Using digital printing technology, cell phone apps have also been used to build brands and improve user experience. McDonald’s have even designed an app that will

As understanding of the brand’s value as an intangible asset has increased, brand building has become higher priority. Consumer products, from global brands like Coca-Cola to local brands such as Dorset Cereals and Nakd, use packaging design as the primary expression of their brand design Jeremy Davies, head of marketing, Echo Brand Design

Oct - Dec 2016 International Finance Magazine

129

Branding

130

speed up ordering and delivery. Marketing costs, of course, will vary between companies which are global brands and small businesses and startups. The big companies Adidas are one such brand that has built a global footprint, employing over 46,000 people across the world. In the first half of this year alone, it can boast a gross profit of €3.9 billion. Jan Runau, Adidas’ chief corporate communication officer, said, “While expenditure for the pointof-sale investments consists of expenses to support the group’s sell-through development at the pointof-sale. The expenditure for marketing investments consists of items such as expenses for promotion partnerships, advertising, public relations and other communication activities. “In absolute terms, expenditure for point-

of-sale and marketing investments increased 22% to €2.348 billion in 2015 from €1.923 billion in the prior year, to strengthen brand desirability.” An example of a typical modern day operation for Adidas can be found at the last football World Cup finals two years ago, held in Brazil. Adidas made a huge effort to produce exclusive content across social and global retail channels, entirely in sync with how World Cup matches unfolded. London-based social media agency We Are Social gathered content on over 100 players, who would be wearing Adidas manufactured shirts at the tournament. They then moulded all of the information into a ‘content bible’, with 1,000 images and 160 videos usage in reaction to game play. In return for their determination to be the

International Finance Magazine Oct - Dec 2016

most talked about brand during the tournament, Adidas were just that. Through the event, they commanded 1.6 million tweets, and their You Tube audience got more than 200,000 new subscribers. The small companies Life is different for the London-based the7stars media agency, which began its journey 11 years ago. While an exciting and growing business, the 140 employees and £228 million worth of billings reveal a business dwarfed by giants such as Adidas. The process they go through before they decide on a branding budget, involves really getting under the skin of the client’s business. This usually involves them asking a lot of questions, and challenging them to really think about what they want to achieve with a campaign. Sam Farrard, the

“

Smaller companies and startups generally have less experience of running brand campaigns and much more to lose than big brands. This lack of experience also makes it more difficult to predict what a campaign will achieve, which makes planning a mix of faith as well as the science Sam Farrard, accounts director, the7stars media agency

Branding

In absolute terms, expenditure for point-of-sale and marketing investments increased 22% to €2.348 billion in 2015 from €1.923 billion in the prior year, to strengthen brand desirability accounts director of the company, explained, “Smaller companies and startups generally have less experience of running brand campaigns and much more to lose than big brands. This lack of experience also makes it more difficult to predict what a campaign will achieve, which makes planning a mix of faith as well as the science.” He opined that budget setting for new brands usually involves a choice between moving slowly and carefully. This means setting incremental test budgets and proving success, or recognising that there is a

need to act quickly and seize market opportunities by scaling quickly. For bigger brands with a huge budget, that challenge is more what you are going to sacrifice to focus impact, rather than trying to do everything, because large brand names can. Whereas Adidas believe that they are unfazed by competitors’ marketing campaigns, the7stars are keeping a watchful eye on their rivals, to achieve the most with their budget. Farrard believes that gaining an insight into what competitors are up, to can also help communications planning.

“In the majority of sectors, there are a number of competitors behaving in broadly a similar way, for example on certain days or in certain channels,” he added. Brands should decide whether to conform to historic norms, for example, because that is the most effective way of spending a budget. Or, it represents an opportunity to do something different and stand out from the rest. IFM editor@ifinancemag.com

131

While expenditure for the point-of-sale investments consists of expenses to support the group’s sellthrough development at the point-of-sale. The expenditure for marketing investments consists of items such as expenses for promotion partnerships, advertising, public relations and other communication activities Jan Runau, Adidas’ chief corporate communication officer

Oct - Dec 2016 International Finance Magazine

OPINION Opinion: Branding

OPINION

Rob Brown

132

Develop a standout reputation for

what you do

Corporate reputations are becoming more entwined with personal reputations

International Finance Magazine Oct - Dec 2016

OPINION Opinion: Branding

our reputation is what people say about you behind your back, and sometimes to your face. It’s what people think, do, feel and say when they come into contact with you, your name or your brand. And it’s probably your greatest commercial asset. Yet, few individuals or companies even give much thought to what their reputation is and how they earned it. If you think your reputation doesn’t matter, open the newspapers and check out the stories. Many of them feature broken relationships, misplaced trust, unkept promises, failed commitments, lack of loyalty and fragile

personalities. They all come down to one word – reputation. The reputation of government, the banking system, the football system, the Olympic system, judicial system, the education system, the financial system, the taxation system… all are at an all-time low. Corporate companies get news headlines mostly for the wrong reasons. Big brands that care more for their profits than their customers make everyday news. Scandal after scandal affect our confidence in what we’ve traditionally held dear. Call centres, airlines, banks and big energy companies stoop to new lows in customer

satisfaction surveys. It’s not just the big brands and huge commercial ecosystems like government that have let us down. Our heroes do the same. Retail icon Sir Philip Green sees his reputation in tatters after virtually bankrupting British Home Stores before selling it on. Choose any of your favourite celebrity or icon – they’re generally all flawed, unbalanced or out of touch in one way or another. Pick any number of politicians, who we voted into office and now seem more interested in their own career than our welfare. Reputation and bottom line Do these people or

companies care that their reputation is suffering? Does a poor reputation actually affect the bottom line? If you look at Ryanair’s profits, you’d say not. The airline carrier flew 101million passengers in

133

Oct - Dec 2016 International Finance Magazine

OPINION Opinion: Branding

134

2015, up from 86m the year before. And that’s despite a shocking record of customer service and complaints. Then again, you look at Volkswagen and Toyota and the PR hits they’ve taken in the last few years, and you’ll see that sales are down considerably. The lesson is what when it comes to critical factors, such as safety and reliability, the markets show no mercy. For more superficial factors, such as service and pricing, the reputational hit is less severe. Nevertheless, companies and many of the above mentioned systems might still suffer longer term problems if they don’t get their house in order. Difficulties in attracting things like sponsorship, investment, high quality staff and even bank credit can certainly impact the bottom line. Corporate reputations are becoming more and more entwined with personal reputations. Your personal reputation is your personal share price on the stock

market of life. It shows what confidence people have in you, and whether they’ll invest time, money or effort in supporting your cause. Entrepreneurs like Richard Branson, who lead from the front, are so heavily attached to their empire that their personal share price affects the corporate one. CEOs who front their organisations

quickly realise that their words and deeds play out publicly in ways that can make or break public confidence. For confirmation of that, ask former jewelry mogul Gerald Ratner, Martin Winterkorn, former CEO of Volkswagen and Tony Hayward, former chief executive of BP. Your reputation is very

much in your control. There are many ways to protect it, build it and nurture it in today’s world. Almost anyone can become a thought leader, propagate a breakthrough idea or show standout expertise in a particular area. IFM editor@ifinancemag.com

Rob Brown, author of Build Your Reputation – Grow Your Personal Brand for Career and Business Success (Wiley, 29 July 2016), is the Founder and CEO of the Networking Coaching Academy, which helps people build connections and reputations for greater influence and career opportunities. His Networking Giants Radio Show features experts from all over the world discussing collaborative and connected workforces, referrals, business networking, communicating, influence, trust, likeability, personal branding and reputation building. He lives in Nottingham, UK, the home of Robin Hood, with his wife Amanda and two daughters Georgia and Madison. He has a black belt in kickboxing, loves chocolate and fitness boot camps, enjoys chess and backgammon, and plays four musical instruments moderately well.

International Finance Magazine Oct - Dec 2016

OPINION Opinion: Branding

Play to Your Strengths

What makes you worth knowing? What makes you valuable to others? What do you find easy that others find difficult? It’s likely that you’ll make your name in the areas where you’re most ‘in flow’. It could be your skills, your knowledge, your connections, your track record, your ideas, your influence or even your likeability. Rather than start from the back of the queue in a new area or discipline, focus on what you’re already good at if you want to make the biggest impact.

Reputation management

ocial capital, career capital, relationship capital, human capital – they can all be built with the right networking, profiling and positioning. This is called reputation management, and in today’s online, mobile and digital

world, it has never been easier. The problem is that it’s also never been noisier. Attention is currency. Everyone is shouting in an attempt to stand out and be heard. You’re fighting for exposure, air time and influence with your rivals and competitors.

As a business person, here are five practical steps to develop a standout reputation for what you do.

Find Your Start Point

What are you known for right now? What traits or actions do people think of when your name is mentioned? See what you’ve got to work with or against. There’s only one way to find out – ask them!

Decide Your Goal

What do you want to be famous for? Who do you want to be known by? Ultimately, what do you want people to say, think, do and feel when they come into contact with you or your name? Once you articulate your intent, you can begin to build your desired reputation.

Spread the Word

It’s no good being the world’s best kept secret. To build a formidable reputation, you need to be talked about and thought about. That means raising your profile to get on the radars of the right people. The strategy for survival is visibility, both online using social media and face to face in corridors and business events. Sharing your ideas, opinions and insights is vital to your fame, fortune and career prospects.

Build Your Network

Put simply, your network is who you know, and your reputation is who knows you. When you build the first, you build the second. Knowing and being known are the critical success factors for a standout reputation, so make connections whenever and however you can. Sophisticated workers cultivate a ‘Personal Board of Advisors’ – an inner circle of advocates, mentors, sponsors, advisors and allies that promote them better than they promote themselves. In the world of finance where reputation is a valuable currency, learn the lessons from the big corporates, the celebrities and the short-sighted business leaders. Safeguard and build your reputation today, because you’re going to need it tomorrow!

Oct - Dec 2016 International Finance Magazine

135

CALENDAR INTERVIEW

MARK YOUR

Calendar

31 January -02 February 2017 Distributech Conference & Exhibition (Power, Renewable Energy & Energy Conservation industry)

136

Tokyo, Japan

Melbourne, Australia

Learning Technologies (Technology) London, UK

Hamburg, Germany

22-24 February 2017 Online Retail Supply Chain Summit (Retail Supply Chain) Melbourne, Australia

02 February 2017 E-commerce Berlin Expo (E-Commerce) Berlin, Germany

01-05 March 2017 The Art Show (Art)

New York, USA

02 February 2017 Small Business Expo (Business Services industry) Houston, USA

02 March 2017 Small Business Expo (Small Business Expo) Miami, USA

18-19 February 2017 The Listed Property Show (Property) London, UK

09-11 December 2016 Mineralien Hamburg (Minerals, Metals & Ores industry)

Perth, Australia

01-02 February 2017

03 December 2016 Australian Fine Mineral Show (Minerals, Metals & Ores industry)

Australasian Oil & Gas Exhibition (Oil & Gas)

San Diego, USA

01-05 December 2016 International Minerals & Fossils Show (Minerals, Metals & Ores industry)

22-24 February 2017

07-08 March 2017 Internet World Trade fair (Internet World) Munich, Germany

21-23 February 2017 International Petroleum Week (Petroleum) London, UK

10-12 March 2017 International Exhibition for Model Trains, Specials & AccessoriesÂ (Railway, Shipping & Aviation industry) Sinsheim, Germany

24-26 January 2017 OilDoc Conference and Exhibition (Petroleum, Oil & Gas industry) Rosenheim, Germany

22-23 February 2017 Business Travel Show (Business Travel) London, UK

10-12 March 2017 China International Offshore Oil & Gas Exhibition (Oil & Gas) Beijing, China

International Finance Magazine Oct - Dec 2016

Access the best stories in the world of business at your convenience

Read IFM magazine

on your TAB

Also available on iPhone (5 and above)

Scan to get your digital edition

Read this issue on your smartphone or tablet

‘I started trading Stocks at 13’ Yoni Assia, co-founder and CEO of eToro, is passionate about finance and technology, which pretty much explains why he started a fintech company

138

How do you like to spend time outside of office? The fact is I am usually very busy with my work. So whatever little time I get, I love to be with my children. I make sure I accompany my kids for the various courses they learn after school. For instance, my daughter is learning ballet. So I take to the ballet class and watch her practice. I also take my kids to the zoo. They love to see different animals.

now — merging finance and technology. Do you have a fetish for the latest gadgets? Which was the last gadget you bought? Nothing specific. I bought a great

What are your hobbies? Most of my life revolves around my work. So anything related to finance and technology fascinates me. When I was 13 year old, my dad, who was the COO of a public company, gave me stocks of the firm. I started trading and would be glued to the screen seeing how the stocks went up and down through the day. And this is what I am doing even

International Finance Magazine Oct - Dec 2016

camera. I also bought a home theatre, if you can call it a gadget. I watch movies with my wife or friends.

Which is the last book you read? To be honest, I do not get to read as much as I would love to. The most recent book I read was Flash Boys by Michael Lewis. How often do you holiday with your family? Your favourite destination? I holiday once or twice in a year depending on my work. The last family holiday was in Seychelles. I want my kids to have a global outlook and get introduced to different cultures of the world. So I make sure they visit as many places and countries as my schedule permits.

As told to Suparna Goswami Bhattacharya