Finance Execs Avoid Risky Deals

Finance executives are taking risk personally, and they are turning away from some business opportunities they think are too risky, according to Thomson Reuters Regulatory Intelligence’s fourth annual global Conduct Risk survey.

It found that nearly a third (29%) of financial executives say their firms have declined potentially profitable business opportunities due to culture and/or conduct risk concerns, compared with 37% of respondents at global systemically important financial institutions (G-SIFIs).  The G-SIFIs are ahead in most culture/conduct categories because they have been working at it longer, the report suggests.

Concern by financial executives about the risks of personal liability appears to be affecting the strategic business decisions they make, concluded the Thomson Reuters survey report. It suggested that increased actions by regulators worldwide are beginning to change behaviors of decision makers at banks, brokerage and asset management firms and insurance companies.

“The frank concerns and views shared by participants reinforce challenges their peers face in all financial services sectors,” said Stacey English, head of regulatory intelligence at Thomson Reuters and a co-author of the report. “Neither culture nor conduct risk are new concepts but this year’s survey emphasizes how both remain at the top of firms’ and regulator priorities, directly impacting strategy as they face greater prospects of personal liability.”

The biggest firms have been working on conduct and culture for a long time, said English. Progress appears mixed in the survey partly because cultural conduct is difficult to define and implement — it is very qualitative.

“Regulators have never defined it and they won’t define it,” she said.

The report said that: “There seems to be a widespread regulatory recognition that, while cultural change is the overriding objective of financial regulation, it cannot be changed by regulatory fiat…Regulators have chosen not to define the term ‘conduct risk’, preferring instead that firms should do so in a way that is meaningful to their businesses.”

Most executives (87%) at G-SIFIs agreed that continued focus on culture and conduct risk will increase personal liability, compared with 73% at other firms. The disparity is potentially the result of a lack of consistent definition for culture and conduct risk.

Once again, respondents ranked culture, ethics and integrity (59%) as their top three concerns of conduct risk, followed by corporate governance and tone from the top (52%), and conflicts of interest (49%).

The biggest challenge for financial institutions, English added, is the pace of regulatory change — a four-fold increase in the last four years, plus political uncertainty with Brexit and the election of President Donald Trump.

Financial institutions need compliance monitoring, internal monitoring, complaints analysis and awareness of what their customers and staff are saying. In a field as difficult to define as conduct and culture, it’s probably inevitable that a report based on a survey will seem a bit nebulous.

For example, the report includes selections from some annual reports.

Wells Fargo, 2015: “Our risk culture also seeks to foster an environment that encourages and promotes robust communication and cooperation among the Company’s three lines of defense.”

Statements of values are not enough

Wells Fargo 459

John Stumpf, chairman and CEO at Wells, resigned in October over a long-running bank practice of opening accounts for people without their permission. The board required him to forfeit $41 million in unvested equity. Oh well, so much for risk culture.

Barclays, 2015: Conduct risk: Detriment through inappropriate judgment in execution of business activities. Its CEO, Jes Staley, is facing disciplinary action for trying to discover the identity of a whistleblower, twice.

The survey said that responsibility for compliance has shifted from the board to compliance teams at many firms. The compliance teams own the policy and implementation, but at the same time responsibility has to be at the very top, the report concludes.

“Culture in particular has become the holy grail this year as regulators recognize that all good things, in behavioral terms, flow from getting culture right,” according to the report.

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ING Launches Finance Aggregation App

ING, the Dutch bank that had to withdraw from retail banking in several foreign markets during the financial crisis, is re-entering the UK retail market with an app called Yolt which lets users  manage their finances with different banks for different financial services in one place.

The app integrates the users’ bank accounts (including savings and credit card accounts) in one mobile dashboard. It also lets them know how many days are left until pay day, predicts their bank balance based on their direct debits and points out any significant changes in their spending patterns. The functionality is similar to what Simple and Moven offer, although they provide the service for a single bank account.

The app was developed in-house by ING’s Innovation Office in Amsterdam.

“We built the aggregator in the way that people think about money; how long is it before their pay date; how much are they spending and what is the risk of their going overdrawn,” said Ignacio Vilar, ING’s chief innovation officer.

Since January, the team has tested, designed and validated the proposition with UK consumers and a large group of wholesale banking colleagues. The official launch is expected next year under a separate brand ‘Yolt’, endorsed by ING. It will become available on iOS and Android in the coming months.

“We believe we have to reinvent the way we are providing customer service; this is where becoming a platform and the place to go is core to our strategy,” said Vilar.

In last week’s strategy update to analysts and investors, CEO Ralph Hamers stressed the Banks’ ambition to continue to be a leader in digital banking, offering a better customer experience by moving to open platforms and new ecosystems.

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Fortune’s Fastest Growing Includes 28 [Often Obscure]Financial Firms

The current issue of Fortune (September 15, 2016) has a list of the fastest growing companies in the world, and 28 are banks and other financial institutions.

Okay, Facebook is on the list too,  at Number 3.

The opening note says “The behemoth banks have sometimes been vilified by protesters or scorned by politicians.” [Obviously written before the long-running Wells Fargo abusive behavior finally gained national attention.] “But here’s a different kind of responses, as customer-focused competitors rise up. Such rejuvenation is crucial for the economy…”

The list includes Bear State Financial, Banc of California and CU Bancorp which has a tight focus on Los Angeles and Orange County. Many of the banks are laser-focused on a small community for both deposits from, and lending to, locals firms and individuals.

The list also include the Intercontinental Exchange (ICE) which bought the New York Stock Exchange, which ranks just below Simmons First National Bank of Pine Bluff, Ark but above Bank of the Ozarks, in Little Rock.

It’s an intriguing list that suggests the usual focus on high tech finance may be missing some alternative business models and profit opportunities.




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Skills Shortage Slows Adoption Of IoT, Big Data

A new analysis of technology trends  from Capita Technology Solutions and Cisco reveals a strong disconnect between nine key trends, including the Internet of Things and big data, and the ability of businesses to implement the technology to realize those trends.

Among the key findings is a disconnect between the apparent relevance of a trend compared with the number of decision makers who say their industry has the skills to implement it.

For example, while 70 per cent of IT decision makers said the Internet of Things (IoT) was relevant to their business, almost three quarters (71 per cent) said they did not have the skills to identify the opportunities for growth offered by IoT, while 80 per cent they did not have the skills to capitalize on the data received from IoT. Just 30 per cent said it was being implemented.

Similarly, nine in 10 businesses said big data was relevant to their business, but it was being implemented in fewer than four in 10 businesses (39 per cent) and 64 per cent did not have the skills to recognize how they could use big data within their business.

The report identified several key barriers to implementation of IoT, the most prevalent being the perceived risk of security breaches, issues surrounding data governance and overcoming problems created by adapting legacy IT systems.

Legacy IT infrastructure was the top barrier to the implementation of big data, along with data governance issues and cost.

Adam Jarvis, managing director, Capita Technology Solutions, said: “It’s clear that there are several important, technology-led trends which have the capacity to transform the way business is done,” said Adam Jarvis, managing director, Capita Technology Solutions.
“While it is encouraging that levels of awareness around the strategic benefits of those trends are high, these results suggest more needs to be done to support businesses and help them close what is a substantial skills gap.

“Without the necessary skills and infrastructure needed to implement trends such as IoT and big data, businesses across the board will suffer long-term competitive disadvantage; it is up to us as an industry to find the best and right ways to deliver that support,” he added.

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The Australian Securities Exchange (ASX) will use Metamako for real-time monitoring of its new trading platform and for time-stamping and time synchronization of its internal network traffic.

“We evaluated a number of solutions, but in the end, the accuracy and performance of Metamako’s devices made them the obvious choice,” said Nicholas Rakebrandt, manager of connectivity development at ASX. ” Metamako’s solutions are simpler than other devices, and perform exceptionally well; we are already seeing the benefits of using the company’s technology. It’s an additional bonus that Metamako is an Australian fintech company, which has very quickly captured a share of the global market.”

Dr. Dave Snowdon, founder and CTO of Metamako, said ASX is the first major exchange to publicly announce its use of Metamako.

“To be at the heart of ASX’s network is a real recognition of the excellence of our devices. We have customers in the US, Asia and Europe, across HFT, automated trading, banking and ISVs. The ASX win is a very significant development for us and underlines the need for accurate monitoring, not just for banks and trading houses, but for exchanges as well.”

Network monitoring is a hot topic at the moment, with the MIFID II RTS-25 requirements bringing a global focus on timing technology. As a result, exchanges and trading firms alike are looking to build robust monitoring. In the U.S. the SEC recently issued new rules that would, among other things, require self-regulating organization and their members to synchronize their business clocks and record any reportable events in millisecond or finer increments.

“High-precision monitoring of the timing of network messages is a critical part of the puzzle for all types of finance firms – exchanges are no different,” added Snowdon. “All these institutions need to ensure that their systems are not just working correctly, but performing as predicted, with a high degree of determinism, to optimize the behavior of trading-related activities.”

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How Can Regional and Mid-Tier Banks Catch Up to the Big Banks in Mobile?

Regional and mid-tier banks face an uphill battle on the digital front, but have advantages they can capitalize on with some focus and determination

Alarm bells are sounding in boardrooms of regional and mid-tier banks across the U.S. Or at least they should be. The largest national banks have pulled ahead in mobile, according a recent Forrester report — the 2016 U.S. Mobile Banking Functionality Benchmark. While a year ago none of the big banks ranked at the top in Forrester’s mobile banking, this year Bank of America and Wells Fargo earned the highest scores, followed by Chase, US Bank, and Citi.

It’s a trend that spells trouble for regional and mid-tier banks, which are falling behind the industry leaders. The 2016 U.S. Retail Banking Customer Satisfaction Study from J.D. Power noted that for the first time ever the largest six banks had taken the lead in customer satisfaction, largely through better customer-facing technology.

Too Big to Fail or Too Small to Complete?

While regulators and politicians may be concerned with the big banks getting bigger, market forces will continue to favor the big banks as long as they do a better job serving their customers. According to a new Greenwich Associates report, the odds are stacked in favor of the big players, as “regional banks will struggle to keep up with mounting costs of IT investments for client benefit.”

Jim Marous, co-publisher of The Financial Brand, said the J.D. Powers report shows the big banks have made significant improvements in all digital categories. “The inability for the majority of regional and mid-sized banks to keep pace with investment in digital technology became more apparent in the most recent survey, with online, mobile and ATM satisfaction levels all being below 2015 levels,” according to Marous.

How customers feel about a bank’s digital offerings could affect their views of other banking services, from fees to face-to-face encounters, J.D. Power found. Marous warned that digital natives are no longer defined by demographics but can span a bank’s entire customer base. The big banks ranked better across multiple segments, including the coveted millennials, emerging affluents, and minorities.

A 2015 Bain & Company study of customer behavior and loyalty in retail banking shows that “for example, Chase has steadily progressed in loyalty rankings relative to regional banks, in part by developing a distinctive mobile experience. This creates a challenge for regional banks that struggle to match the investment required to lead in mobile. But the biggest winner in creating distinctive experiences is direct bank USAA,” showing that it’s not just a matter of size but also focus. Smaller banks with a digital focus are better positioned for success in the digital age.

What Can Smaller Banks Do?

Many consumers find the “not so big” banks appealing. However, as consumer behavior and preferences continue to evolve, there are steps these banks need to take to better position themselves against the surge of their larger competitors.

Realize investment in technology is no longer optional: Regional and community banks may be underestimating the importance of a strong digital offering. The big banks’ advantage in technology is not new. What’s new is how essential technology has become to everything we do, and banking is no exception. According to McKinsey, over 30% of financial services revenues could be displaced as a result of digital disruption. With the country’s largest banks achieving the highest scores in the increasingly important mobile channel, laggards are putting their business at risk.

Don’t lose the personal touch: Traditionally, community and regional banks prided themselves on providing a personalized service that helped these banks chalk up high satisfaction scores, according to the American Consumer Satisfaction Index on banking as recent as 2013.

A 2014 Gallup survey showed that regional and small banks did a better job making customers feel they are on their side. As a growing portion of customer interactions takes place through digital channels, these banks need to invest in transforming this level of personal touch to their digital platforms. Banks that do a good job with digital and personalization win with millennials, as Ally Financial is showing.

Don’t go it alone: It’s important to mention that competition is no longer coming only from traditional banks. Alternative financial services providers from Silicon Valley to Silicon Alley are enticing customers with slick and simple applications and products that slowly but surely continue to snatch business away from the banks. The big banks are doing a pretty good job partnering with FinTech companies to turn the disruptors into collaborators. Some smaller banks are following their footsteps, but not enough.

Jim Marous points to various ways in which banks of all sizes partner with FinTech companies, noting that “smaller banks cannot afford to stay on the sideline while larger banks and non-bank FinTech competitors better serve the digital consumer.” We agree.

Additional Resources

Forrester Report: Using Digital Money Management to Deliver Personalized Financial Coaching

On-demand Webinar: Up Close and Personal: The Future of Digital Banking

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Brexit and financial services: the only certainty is uncertainty

From Ovum, the financial services consultancy

By a slender majority of 51.9% to 48.1% the United Kingdom has voted to leave the European Union. The move will have ramifications for banking and financial services internationally as the country renegotiates its relationship with the EU and could topple London’s standing as a leading global financial center.
Nothing will change immediately, but in the short-term the industry and the IT vendors that serve it will be hit by the uncertainty that will follow the vote and through the period of renegotiation.
In the longer term, much depends on how those affect the ability of London-based Financial Institutions (FIs) to operate in the EU under ‘passporting’ arrangements. While underlying IT needs and activity will remain the same in aggregate, they may move elsewhere, as budget centers and decision-making shifts into EU countries.
In capital markets and investment banking this is a particular issue as international FIs face potential changes to their legal entity status and location of some roles. There are also questions over the future of trading and clearing infrastructures, particularly for euro-denominated securities.
Uncertainty will affect projects in-flight
While there are no immediate changes to the operating environment for FIs – all EU-inspired laws that have been transposed to UK law remain in place until amended or repealed by the UK Parliament. The vote simply triggers a sequence of actions: the decision has to be approved by the government and the UK then invokes Article 50 of the EU Treaty, which begins a period of negotiation on the terms of withdrawal that is expected to last at least two years.
During that period the fundamental drivers of IT investment for the industry and institutions across Europe will remain unchanged of course but uncertainty over the outcome of the exit negotiations will undoubtedly see imminent IT projects paused or de-scoped, while some large-scale projects may be shelved indefinitely.
The longer the period of uncertainty, the greater the risk and the impact.
From a banking perspective, some of the biggest immediate challenges will come from the loss of the UK’s ability to passport FIs into the EU. Institutions which have European or global HQs in the City will be forced to re-evaluate, with the consequences of that rippling through the supply chain.
Immediate questions will be raised over the compliance requirements around European-level initiatives and regulations such as the second Payment Services Directive (PSD II) and the pan-eurozone SEPA Inst immediate payments project. With the implementation timelines falling well within the period in which exit negotiations will take place, there will be uncertainty (and inconsistency) in the way banks will respond.
The threat to the City of London’s position as a leading trading venue is perhaps even more profound. As things stand it appears that the UK will diminish in importance as a hub for the financial services industry. At an aggregate level, total demand for software, hardware and services from financial institutions will continue to be buoyant, but vendors will need to adjust their go-to-market and implementation strategies accordingly.
Over the past 30 years London has vied with New York for the title of Financial Capital of the World, but it is worth bearing in mind that this status can be almost entirely traced to the deregulation of the City of London in the ‘Big Bang’ in October 1986 when the London Stock Exchange monopoly on securities trading was removed.
This created an influx of Wall Street trading houses and large Europeans banks to London, who brought a completely different, more aggressive, culture to the market, and who quickly snapped up local broking firms and banks.
The City of today has been built around this, creating an infrastructure of service firms such as lawyers, accountants and IT professionals that would be hard for any other European center to replace quickly, but the three decades between Big Bang and Brexit may one day be looked back on as a golden age.
Insurers face increased costs from compliance requirements
The biggest impact on the insurance industry would be regulatory. Currently insurers conduct cross border business within Europe through the provision of a single European insurance license. As a result of this ease of access to 500m customers, the UK insurance sector contributing a trade surplus of over £12Bn in 2014.
Brexit could at some point in the future require that UK insurers meet the insurance regulation of each EU member state with which they wish to conduct business – potentially meeting the varying regulatory rules of 28 countries to achieve what we currently have. The additional resources and costs to enact and maintain this would be enormous as well as make solvency and capital reserving hugely complex and inefficient reducing insurer’s capacity to write business.
Perhaps the most ironic outcome of the regulatory impact of Brexit on the insurance is seen in Solvency II. This piece of fundamental reform of the EU insurance industry, strongly championed by the UK insurance industry and having taken a decade to implement came into force at the start of 2016. The UK insurance industry which has implemented and meets these requirements, will at some point have to apply for so-called ‘Solvency II equivalence’ status as an ‘external third-party state’.
Despite the pro-leave camp view that the UK insurance industry would thrive further if it did not need to meet the costly burden of EU regulation (pointing at the Swiss insurance sector as an example), regulation is critical to ensure the robust operation of an insurance market capable of meeting all its liabilities. In Ovum’s opinion Brexit will mean a significant backwards step for the UK insurance industry incurring an overall increase in the cost of meeting compliance needs and making it more difficult to undertake international business.
Kieran Hines, Practice Leader, Financial Services Technology
Daniel Mayo, Chief Analyst, Financial Services Technology
Charles Juniper, Principal Analyst, Financial Services Technology
David Bannister, Principal Analyst, Financial Services Technology
Gilles Ubaghs, Senior Analyst, Financial Services Technology
Noora Haapajärvi, Associate Analyst, Financial Services Technology
noora haapajä

Ovum Consulting
We hope that this analysis will help you make informed and imaginative business decisions. If you have further requirements, Ovum’s consulting team may be able to help you. For more information about Ovum’s consulting capabilities, please contact us directly at


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