Category Archives: Financial Institutions

What innovation strategies will unlock the growth in the financial sector in 2015?

Growth drivers of financial services, Today and Tomorrow

It will be very difficult to not mention ‘Fintech’ when discussing financial innovation of today. The buzz word has captured the attention of the media and, in turn, the media has started a cycle of monetization (conferences, special reports etc). No doubt, financial technology will be a key growth driver for the industry as a whole and over a longer period of time. Financial services companies that have brushed it aside will likely suffer customer attrition, while those that have embraced it will attract more and more ‘mobile’ customers. Some thinkers speculate that new comers coming from outside the financial industry could oust big and slow incumbents, but that is a little too stretched. Finance is, at the very core, a ‘conservative’ industry. But even though ‘Fintech’ is here to stay, it won’t be the main driver of growth for the year at hand, 2015.

Having touched upon the hype of today, which innovation strategies will unlock the growth in the financial sector in 2015? The short answer is the innovation that has been happening at the core of innovative financial services firms, which is to acquire the execution capability to provide cross-border investment solutions and advice in the institutional space, while also providing the ability to replicate something similar for retail investors. These early movers will immediately reap the benefits and growth will come in the traditional forms of increased AUM and fatter fees, not tomorrow, but today.

Asia’s Institutional Appetite for Global Assets

There is much money in Asia that is looking for solutions to invest in global asset classes. China’s sovereign wealth fund CIC (China Investment Corporation) which holds assets of 652.7B USD (end of 2013) of which about 220B is invested in overseas assets, manages about 67% of this through external management. Those Chinese and global advisors who have invested in their network and relationship with CIC and Chinese decision makers will reap great rewards. CIC holdings grew a whopping 13% (77B USD in absolute terms) in 2013.

Japan’s Government Pension Investment Fund (GPIF), the largest of its kind in the world, manages some 137B JPY (1.14T USD, end of 3Q 2014). Its overseas allocation is 13.14% in global bonds and 19.64% in global equities. Recently, its decision to more than double its target allocation of foreign stocks to 25 percent, which came together with BOJ’s shocking decision to ramp up stimulus, was greeted with a world-wide equities rally. Again, those firms who had strategized before-hand and have come up with innovative solutions will stand to benefit.

NPS, the Korean national pension grew 10% in 2014 to 426B USD. Of the 42.9B USD increase, 20B was in global asset classes.

Recently, the Ministry of Employment and Labor of Korea, selected one lead manager to manage its 14B USD holdings. In the past, it used to directly apportion the holdings to about 10 different managers. In the new scheme, a single manager will be making the decision as to which asset manager will get how much, while the firm earns a fee on the total AUM for providing advice and risk management services. This ‘beauty-contest’ to decide which firm will lead was decided based on many criteria, of which allocation and execution skills were key.

Reduced home bias, a common trend for all Markets

In their Global Pension Assets Study 2015, Towers Watson calculated a 6.1% rise in the assets of the top 16 markets reaching a 2014 year-end total of 36T USD. During the last 10 years, the most rapidly growing pension markets have been Mexico (16.1%), Australia (11.7%), Hong Kong (10.0%), Brazil (9.7%) and Canada (7.3), when measured in US dollar terms. Since 1995 bonds, equities and cash allocations have been reduced to a varying degree while allocations to other alternative assets have increased from 5% to 25%. There is a clear sign of reduced home bias in equities, as the weight of domestic equities in pension assets portfolios has fell, on average, from 64.7% in 1998 to 42.9% in 2014.

Innovation of Core Competencies: How to execute is a strategic choice

As the most visible ‘smart money’ in each of the regions, SWFs and pensions have great impact on how wealth managers advise and HNWIs invest. Financial services firms all over the world, both local and global, both emerging and developed, will be competing for the patronage of not just institutional clients but also HNWIs.

Winners will have already answered critical strategic questions: Will it provide execution for all or part of the vast space that is global asset classes? Will it forge alliances or go it alone to create a platform for that chosen space? How much customization and dedicated personnel will it provide to the major SWF and pensions? How much, if at all, can this capability be replicated or mirrored for the retail clients?

Local firms have the clients, global firms have the execution capability. Fintech firms are providing easier and cheaper ways to reach both clients and execution platforms. The innovation challenge is huge: people, IT and networks. It is almost to the scale of reinventing the whole business process and value chain.

In the Now

This megatrend is not in the near future, it is in the here and now: 2015. Firms that innovated their old locally oriented models are experiencing growth. Those that think this is still a future event are quickly losing ground.

“How should Corporate Treasurers handle currency volatility in the markets with hedging?” Interview with Mr. Ashish Advani

According to David Woo of Bank of America Merrill Lynch, an unspoken currency war has broken out, which would make it more expensive for companies to take out insurance against currency flows. How should corporate treasurers handle this currency volatility in the markets with hedging?

The world has been experiencing some form or another of currency wars for the past couple of years. This has led to a significant amount of volatility in individual currency pairs. Each international company has been affected by this and has had to respond in various ways.

Dependent on the currency hedging policies, companies rarely hedge their translation risk. Translation risks are too large and expensive to hedge and can have a very material effect on cash flow of the company. But many companies will hedge transactional risk, also known as Balance Sheet hedging.

In today’s volatile world where we have such currency wars, there is a definite pattern to the direction of the currencies. The emerging market currencies tend to bunch together while the commodity currencies will act in a particular fashion. It is a little bit easier to manage groups of correlated currencies then hedge each risk by itself.

In this environment, it would be wise for companies to utilize techniques such as Value at Risk (VaR) or Cash Flow at Risk (CFaR) which enables companies use statistical functions of correlation and determine an optimum level of risk between the various currencies. Once a company determines such a statistical level of risk, it can use portfolio risk hedges to manage its currency risks. There are a number of SaaS software solutions that one can use to manage currency risks in such fashion.

Will hedging currency with Exchange-Traded Funds (ETFs) dampen volatility?

There is little to no evidence that currency volatility managed by Over The Counter (OTC) derivatives increases or reduces volatility compared to utilizing Exchange Traded Funds (ETF) as a means of instrument used to hedge risk. One of the critical components of hedging is receiving Hedge Accounting treatment so that the volatility of the hedge portfolio does not run through the P&L each period. By utilizing OTC derivatives, the risk metrics are closely aligned to the hedge instrument thereby achieving a close to perfect matching of terms and thus obtaining Hedge Accounting with very little ineffectiveness.

When we use ETF’s we lose a fair bit of the close matching of the terms of the risk (duration, notional volume, etc.) and thus one can experience a fair bit of effectiveness leakage into the P&L when applying hedge accounting. It is therefore advisable to utilize OTC hedge instruments compared to ETF’s for corporate hedge accounting programs.

What are the steps corporate treasurers can take in regards to foreign exchange risk?

I believe that currency volatility is going to remain with us over the next few years. As the world goes though some unprecedented geo-political, as well as economic turmoil, we may see increase in such currency volatilities. I believe we are in the early phases of a sea change in the world with the US Dollar facing an imminent threat to losing its reserve status in the world. Last time this happened in history was when the British pound lost its reserve status around the 1910-1915 era and the world experienced a World War as one of the outcomes of that turmoil. While I am certainly not predicting similar outcome, it will not be a smooth and orderly transition if the US Dollar loses its reserve status.

This is not a time for Treasurers to be indecisive or nervous about hedging the currency risks that the company faces. It is time to seek and obtain the necessary skills required to manage its risks as well as stay continually abreast of the changes that we are experiencing.

The changes are not limited to the market movements and directions but also refers to the new innovations and techniques of hedging along with the multitudes of changes in accounting guidance that are being unleashed upon corporations. Finally, the new laws and regulations that mandate the tax laws that affect cross border transactions also have to be studied in lock step to ensure that the company is in full compliance with its objectives and is not caught unaware.

It would behoove a Treasurer to obtain professional advice in determining the currency risks, evaluating the various techniques of hedging, choosing the right instruments, understanding and obtaining compliance to accounting regulations and guidelines and then executing a series of hedge transactions. Once that is done, it is also important to continually monitor the risks, observe shifts in markets and then adjust the hedge strategy accordingly.

According to Jared Cummans of ETFdb, “one of biggest hindrances for the currency-hedged world is education; investors simply are not comfortable with the idea of hedging their fund because it sounds intimidating on the surface.” What would you say to these investors hesitant to a currency-hedging strategy? 

Granted that hedging can be an intimidating concept to an average investor or company not large enough for having its own dedicated treasury department of currency and hedging expert. It can become an enhancer of risk rather than a mitigation of risk if applied inappropriately. In some rare cases it can lead to a higher risk of bankruptcy if one is not careful.

Yet that should not be the reason an investor or company decides not to hedge its currency risk. One has to realize that a decision not to hedge is a decision to allow risk to control some part of the results of your business. Like most other risks in business, if you do not manage it, it can have unintended consequences for you. A decision not to hedge or a decision to postpone the decision of hedging due to lack of knowledge is not a prudent decision.

Fortunately today in the market, there are quite a few currency services that can be employed to help assess the situation, determine the risk, optimize the hedging strategy, execute the hedges and manage the accounting behind those hedges. There are a number of turnkey outsourced solutions available for the inexperienced or fearful investors / companies that can help in gaining such expertise in a quick fashion and help getting control of the currency risks that can significantly affect the outcome of your business or investment portfolio.

What are the top trends in the global banking and which segments will be the growth drivers?

There are many challenges that banks in general have to face in the year 2015 and in general in the near future. Let me highlight one, which is the nature of their existence as we have come to know so far.

The impact of technology and the emerging non-banking banks, selling an assortment of products and services, are constantly questioning the concept of the universal bank. A bank will be the company that helps us manage our personal finances, safeguard our savings, facilitate our transactional use of cash, and generally offers individuals and businesses quality services at optimized costs.

Today banks are under tremendous pressure to maintain and improve their strategies for growth and value creation. It is clear that the changes affecting the banking industry are dramatic: regulation, specialization, the pressure to gain size and efficiency, and improvements for scale, are all leading to major players needing rethink their strategies to maintain and improve their ability to generate resources efficiently. Traditional ways that banks have grown so far are in doubt.

 From my point of view there will be 4 major trends in the new banking industry:

  • Impact of technology
  • Regulatory aspects
  • Training and skills of managers
  • Business intelligence applied to customer satisfaction

Innovation in banking will no longer be a differentiator, but an element of survival. In this regard it will require the vital capacity of each bank to establish and develop tools for information management. This allows executives to use this information strategically in order to meet customer expectations. It will no longer be sufficient to have a good product or service, moving forward it will need to be backed by knowing in advance exactly who to target and how it should be offered.

There are signs that the banking industry is polarizing. The guarantee of survival will basically be to become a global player, who can efficiently exploit synergies with industrialized management and enlarge capacities for geographical diversification. And secondly, niche players able to offer tailor-made solutions.

The demands for greater transparency and more demanding regulatory requirements and commitment to society will force global institutions to be more efficient; because if they do not business will become increasingly expensive. Only a business a large enough critical mass to absorb these costs may capitalize banks operationally in the medium term.

In general, banks will have to make great efforts to understand and differentiate the needs of its customers by the segment in which it is intending to grow. Creating internal management instruments for key information and a business intelligence tool that allows them to anticipate their needs will certainly add valuable elements.

Within the retail banking business it has been shown that small and medium enterprises are the most profitable, however this can only be achieved by placing focus on a basis of expertise. After acquiring a new customer its profitability becomes higher than any other segment.

Meanwhile personal and private banking is facing a period of high competitiveness where it is very difficult to differentiate between other market players. Only through faith in their professional service and the ability to generate differentiated products may they achieve sustainable growth rates.

Personal banking banks will struggle to attract “premium” customers. These are families and generally high-income professionals, who seek quick fixes and are highly digitalised. They are accustomed to a high quality service and are consumers of at least 5 products or services offered by the bank among which are; the current account, means of payment (debit and credit), financial products for household savings, insurance protection or planning for the future, and all with easy access via smart phone or tablet.

In regards to the customer opinion, confidence in your personal banker will remain key, but have a prestigious institution away from scandals and a conservative profile will be seen as an added value.

Finally in investment banking, global businesses will be more regulated and transparent. The ability to offer value-added services and advisory for large corporations and institutions will only be available to global banks.

How will digital banking shape the financial sector over the next 1-3 years?

According to Google, 90% of all media interactions are screen-based and we spend as much as 4,4 hours of our leisure time in front of screens every day. Managing our finances are among the top 5 activities that people do on their devices.[1]

Are banks up to the task for this new digital world? How high among our priorities is the digitalization of our industry? Are we following? Or are we leading?

There are 7 powerful forces that are posed to reshape the financial sector over the next 1-3 years:

Incumbent vs Regulatory Innovation

There are currently too many differences among financial markets across the world. In countries like the USA, there are great innovations in mobile payments and social network integration of financial services. Most of these innovations come from individual companies first and then are replicated by their competitors.

In other countries, such as Chile, the innovation comes from the industry as a whole in response to regulatory requirements. This kind of environment has made it possible for instant online fund transfers, funds from check deposits are available the following morning, there’s a national ATM network available to every customer at no cost, etc.

Individual innovation is the engine of forward thinking and of new product development, but regulatory and industrial agreements gives them the power to push these innovations forward.

Mobile only/mobile first

As new generations enter the market, new expectations arise. Millennials expect their financial transactions to be as seamless as checking their status on Facebook, sending a picture on Snapchat or access their files on Dropbox.

The current design of mobile banking is a raw adaptation of the web services that banks have been offering for the past 20 years and that has become obsolete as new technologies emerge.

The ones that will succeed with millennials are those that think of the mobile experience from the ground up, not as a redesign, but a totally original way of thinking. Integration with mobile-only functions as biometric sensors, geotagging, face recognition, etc. will be the base for a new banking experience.

 Account executive role

The account executive has become more of a financial advisor and less of a bureaucrat. Digital transactions allow the customer to be self-sufficient when it comes to day-to-day operations. The account executive must be able to guide their clients in complex financial decisions, offering advice and expertise and leaving the operational load to the back office or the customer himself.

Digital branch

Much has been said about branch obsolescence, but banking digitalization will not make physical locations disappear; it will transform them into digital hubs, where clients can learn to use remote banking, have access to wifi or devices when theirs are unavailable or interact with state of the art ATMs for cash operations, ticketing, card issuing, etc.

Human tellers will probably become obsolete, but that will leave more room for the account executive to fulfill the role previously described and for the client to feel more at home.

New entrants

As mega corporations such as Google, Facebook and Twitter develop new payment platforms, the question every bank should be asking is: Is it easier for a bank to reach as many users as Google or for Google to develop as many financial products as a bank? The answer should be making banks work 24/7 to widen the gap of expertise through innovation and more customized financial products.


As part of the “new entrants” threat, it will become essential for banks to match their brick and mortar presence with their bits and bytes involvement. Ubiquity of a brand is no longer given by a bank’s branch network but also by its presence in social networks, not only through fan pages, but with the development of tools that let you share your goals, achievements and ask or give financial advice. Banks must be where their clients spend most of their time and nowadays that means Facebook, Whatsapp, Twitter, Snapchat, etc.


Finally, advances in digital signature such as fingerprint scanning, iris reading, voice and face recognition and others are changing the document signing landscape, getting rid of the face to face requirement that many countries impose on their financial industries to enforce money laundering prevention.

As a worldwide registry of biometric ID becomes more feasible, the prospect of a 100% paperless bank lurks even closer.

So, as this force looms on the horizon, are we ready to take the lead and start thinking outside the box? Can banks think like a startup? Can we defy our own status quo? The challenge is there and if we don’t take it, someone will… soon.


[1] Google. The New Multiscreen World. August 2012

Social Entrepreneurship: an Alternative to the Welfare State

Since 2008 the world has been struggling with the financial crisis, which is claimed to be the most severe recession since the Great Depression of the 1930s. As a result, the unemployment rate has reached approximately 12% in the EU, and even over 25% in countries like Greece and Spain. It is highest among people under 25 years of age – 23.2% in the EU, 58.7% in Greece and 56.1% in Spain. [1] Continue reading

The Co-op, The Last Bastion of Ethical Banking?

The Co-operative group and its egalitarian business model has long been a mainstay of the British psyche for well over a hundred years. Its commitment to ethical trading and a sharing of profits among its members has enabled it to provide an alternative solution to the conscientious consumer, whether buying food or booking a flight. The merger in 2009 of the Co-op financial services and the Britannia Building Society was seen as a beacon of financial good practice amidst the deepening storm of the economic crisis. Continue reading

Tax Policy and the French Exodus

“If the French go ahead with a 75 percent top rate of tax, we will roll out the red carpet and welcome more French businesses to Britain.” David Cameron, British Prime Minister[1]

During the French presidential elections in April 2012, taxation was a hot campaign issue with socialist candidate François Hollande wanting to introduce a 75% “patriotic tax” for people earning over 1 million Euros, while Sarkozy had previously put in place the bouclier fiscal (tax shield) preventing the French from paying more than 50% of their annual income in tax. Despite predictions from economists that such high rates would cause an exodus, Hollande went along with the initiative Continue reading

Will Germany’s Aversion to Plastic End? The Push For Electronic Payment Methods

First-time visitors to Berlin, Germany, will immediately notice the peculiarity that in the capital of the leading economy in Europe, the majority of restaurants and services accept only cash payments, regardless of the amount. The ease of pulling out a debit or credit card to pay for anything from a pack of gum to a hotel stay is rare in this country. Not to mention the security of calling in a lost card with no risk of loss.

Studies conducted as recently as 2012 show that many Germans still prefer paying cash to putting it on plastic – but should we expect a sea change in 2013 and onwards? Continue reading

European Emerging Markets – Investment Incentives in Eastern Poland

Eastern Poland is the poorest and less developed region in the country; upon entrance to the European Union in May 2004, five Eastern voivodeships (administrative name describing Polish provinces) made up the region with the lowest GDP in the entire European community. It is also the most religious – with the highest rate of Sunday mass attendance [1] – and conservative part of Poland, something which is visibly reflected in the political map of the country. The region massively supports the biggest Polish right-wing catholic party, which received over 40% of votes in the last parliamentary elections (PIS-Law and Justice).[2]

Poor infrastructure, a high unemployment rate, and traditional, conservative social patterns have all created a negative image of the Eastern part of the country. Its inhabitants are often pejoratively called “słoiki” (jars) by the population of Warsaw or other big Polish cities, where many Easterners migrate to in order to find a better job or to study.[3]

Is this region doomed to be forever called “Poland B”, the poor sister that can offer beautiful landscapes, but no employment or professional future? Not necessarily. Continue reading