It may be hard to believe, but the 20th January this year marked one year since Donald Trump’s inauguration. Away from all the media furore surrounding his Presidency to date, one of his less well-publicised reforms to the US tax code is perhaps best summed up by one of his political predecessors.
“You may delay but time will not” – the words of none other than Benjamin Franklin perfectly explain the situation surrounding one particular tax reform currently under review – 871(m). This very specific, not to mention very complicated rule, is a tax on the value of dividends a financial institution receives on a U.S. equity derivatives position.
There is a need for banks to comply with the first part of 871(m) in the here and now, particularly given that there is absolutely no indication that the 871(m) legislation will be dropped. While many banks may be inclined to wait until the outcome of the review, this mentality will only open up a whole world of problems further down the line and is preventing operational teams strategically addressing pressing tax and compliance issues today.
Where it starts to get tricky
The current rule establishes up to a 30% withholding tax on foreign investors on dividend-equivalent payments under equity derivatives, covering a number of product types including swaps, options, futures, MLPs, Structured Notes and convertible debt. And this is where things start to get tricky. A firm’s equity-linked derivative instruments will face a tax withholding if the ratio of change to the fair market value is .08, as of Jan 2019, currently, this is Delta 1, or greater to the corresponding change in the price of its derivative. Banks have no choice but to enhance their systems and processes in order to monitor which equity derivatives underlying constituents fall under 871(m) and know exactly when to calculate and enforce withholding on dividend equivalents.
In order to do this, a careful assessment of intricate calculations based on a set of highly convoluted rules and scenarios needs to be carried out, for example, required Combination Rule logic. In order to do this, firms need to pull together vast amounts of data, ranging from relevant trades (positions alone are insufficient for combination rule tracking), as well as Deltas and Dividends across many instrument types. This would not be so problematic if it was the only issue banks had to contend with. However, with so many other IT initiatives for other Tax and Regulatory mandatory projects also in the works, 871(m) is by no means the only significant compliance requirement on a financial institution’s plate right now.
Ever-changing global tax reforms
Different, albeit similar, challenges also arise from other transaction tax legislation. With this in mind, firms should ensure they minimise multiple interface creation and support costs that result from linking to separate systems managing individual tax rules. Instead, firms should look to feed into a single Transaction Tax system that it is flexible enough to support ever-changing global tax reforms down the line.
It is important to address the 871(m) conundrum now to get ahead of the game. It is not the first, and certainly won’t be the last, transaction tax headache banks are having to overcome under this particular presidential regime. After all, we are in the midst of perhaps the biggest ever shake-up of the US tax code, so who knows what is in store for financial institutions at the end of Trump’s first term.
By Daniel Carpenter, head of regulation atMeritsoft
This is the first in a series of articles on this topic. This article first appeared in the IBSi FinTech Journal February 2018.
The retail banking landscape is becoming increasingly crowded with new offerings from ambitious fintech companies and, increasingly, the Silicon Valley tech giants like Amazon, Facebook and Apple. These players are gaining a growing share of the space between traditional banks and their customers, meaning that banks are now competing with a league of new players.
The British Bankers Association forecasts that by 2020, customers will use their mobile to manage their current account a total of 2.3 billion times a year; more than internet, branch and telephone banking put together.
So, how can retail banks stay competitive? Can they actually learn from the fintech, big tech and social media pioneers that are threatening their central standing as the number one go-to provider of financial services? Could they actually go on to beat them at their own game when it comes to digital customer engagement through banking apps?
The simple answer is, yes. Even despite the fact that competition in the market will intensify once PSD2 comes into force in 2018. The forthcoming regulation will further enable non-banking, data-rich giants like Google and Facebook – as well as innovative fintechs and developers – to lure customers to their own sophisticated and engaging financial management and payment services apps using data from their traditional bank competitors. However, banks still have the competitive edge when it comes to access to customers’ (and financial) data at scale, which they can use to enrich the engagement experience in digital banking.
That said, banks must move swiftly in order to exploit this advantage, while ensuring that they focus on doing so in a sustainable way. To drive long term meaningful engagement with customers, the emphasis must be on using data to enhance user experience. For most banks, this means investing in enriching transaction and financial product data that will enable them to customise their engagement with users. Customers need to feel like their bank understands them and encourages them to form habits that drive real value and impact. They also want to feel that the time they pass on a banking app is time well spent.
In addition to providing a clear and insightful overview of customers personal finances and more advanced features there are many other interesting ways to keep your customers more engaged:
Proactively feeding insights that inform and educate: this could be in the form of recommending a product or giving financial advice that is relevant to a user.
The motivation of a card-linked offer – a type of personalised digital coupon via a third party that customers opt in through their bank, which then allows them to earn instant rewards – is an effective way of encouraging users to make small savings on a day-to-day basis.
Enabling community reinforcement by encouraging users to share progress with peers can also be a helpful way to gamify their saving efforts.
In a post-PSD2 world, banks will no longer be able to rely on the inertia of lifelong customers. 73% of millennials say they are more interested in new financial services offerings from the likes of Amazon and Apple than a traditional bank, so it is essential that banks aim to foster long-term relationships with their customers via their digital platforms. In our lives we have a few critical moments when dealing with money. Our first job, first line of credit, renting and perhaps buying our own place, first child and then maybe investments and considerations for a comfortable retirement. Long-term retention is not just about frequent engagement, but about building up trust and being there for customers with the right advice at the right time in a person’s life, such as:
Guidance on budgeting during university
Advice on pensions and savings after securing a first job
Recommendation or insight that renting can be expensive and perhaps it could make sense to look at buying an apartment in the future
If a bank can show its customers that it knows them well and earn their trust, they’ll be more likely to win customers’ loyalty in the long run.
Personalisation of every customers’ banking experience is tied closely to this idea. Everyone has a different relationship with their finances, yet most banking apps look more or less the same. A bank should provide a digital environment that caters to an individual’s needs and shows them that it understands them. Banking apps should serve different financial behaviours – from those who are more conscientious and “good” with money, to those have lower measures of impulse control and tend to struggle with getting to grips with their finances – and help them develop better financial habits no matter what their personality type.
The countdown to PSD2 is on, and so is the race to meaningfully engage with users between traditional retail banks and their technology rivals. The bank that can offer a data-driven, personalised digital environment that helps people gain the most valuable insight into their current financial situation and motivate them to improve it through a seamless user experience, will be the provider that wins ongoing loyalty from its customers.
The best banking apps should provide a digital environment for continuous dialogue with its customers, that goes beyond the transactional to the emotional. Financially stronger customers will be happier customers, which will, in turn, keep your bank top-of-mind when it comes to other financial services that a customer might need. Get meaningful engagement with customers right, and it might just be the silver bullet for banks when it comes to keeping the big tech challengers at bay.
The beginning of the year is so often the time of fresh starts, new initiatives and renewed hope. But given the seismic challenge global banks face to accurately calculate how much capital is needed to shield themselves from sharp price falls, some could be forgiven for abstaining from any New Year vigour.
From January, banks have been given less than two years to iron out all the operational wrinkles (of which there are many) involved in implementing the market risk and regulatory capital rules known as the Fundamental Review of the Trading Book (FRTB). While this may seem like a way off, and while delays might occur, as they often do with regulatory timetables, one look at the scale of the work ahead shortens the timeframe somewhat. From fundamentally reorganising their trading operations to upgrading their technology capabilities and improving procedures – that’s a lot to get done.
No bank wants to start the New Year in 2020 feeling completely overwhelmed, which is why when it comes to FRTB, decisions need to be made on whether to adopt a Standardised Sensitivity-Based Approach (SBA) or Internal Model Approach (IMA). Historically, all firms with trading operations have been required to use their own internal models, due to the fact that the standard approach relied on notional instead of risk sensitivities. The problem is that under FRTB, current internal models won’t be up to scratch when it comes to enforcing the right level of capital to cope with times of stress. And let’s face it, with the geopolitical climate the way it is, trading desks may be in for more than a few bouts of stress throughout 2018.
New management structures
In order to reduce this reliance on internal models, SBA provides a credible alternative for trading desks to operate under a capital regime that is conservative, but not punitive. But those taking the IMA route will need to get approval for individual trading desks, as outlined by the European Banking Authority (EBA) recently. This presents a significant challenge as it places additional responsibility with each desk head for the capital-output, and increases the complexity of bulge bracket institutions running hundreds of trading desks. Each desk will need to put in place a management structure which controls the information driving its internal model, not to mention understand how the output can be used for risk management.
Regardless of the model banks adopt, the standard vs. IMA approach underpinning FRTB brings specific data challenges, both in terms of the volume and granularity of underlying data sets required to run risk and capital calculations, including the model ability of risk factors for IMA. This is why, regardless of the selected approach, the banks that have identified how to get the most out of their internal and external data sets will be best positioned to get their FRTB preparations off to the best possible start.
The commercial card sector is growing strongly within a flourishing B2B payments market. Many banks recognise the opportunity that offering commercial cards to clients represents to grow revenues and enhance customer experience. However, there is more potential in commercial card schemes than end-user convenience and provider banks need to understand this by enhancing the technology used to support these schemes.
Today, though, even larger institutions with far-reaching commercial card programmes often lack the necessary systems to analyse spend per account, recognise potential to grow revenues from specific programmes or detect customers that are growing faster.
There are many reasons why banks should consider implementing technology to drive up value for themselves and their customers by achieving smarter insights into their commercial card programmes.
Payment automation
Providers that can give customer decision-makers a dashboard view of where spend is happening and identify trends deliver transparency where it’s most required. Payment automation and the ability to capture all spend types makes financial tracking easier, helping find sources of non-compliant spend and enabling financial directors to act quickly.
Beyond this, banks also have the potential to leverage enhanced technology to underpin commercial card offerings and use that to drive important customer analytics.
Metrics to track performance
Key metrics for a bank to track to improve card delivery and performance in this area while also enhancing client engagement include spend per account (SPA), average transaction value (ATV), operational costs and profitability.
A higher SPA is likely to mean improved profitability and ROI for the issuer and greater client satisfaction with the product. Higher ATV scores generally result in greater profitability for the issuer. Moreover, tracking operational costs helps identify controllable costs which can be rapidly minimised without impacting service, while monitoring profitability helps pinpoint opportunities to extend the surplus of revenue over costs.
Added to this, the technology has the potential to track further metrics. These include delinquency rates, which, if low, offer the potential to increase issuer profitability and end user ROI and also client retention, which, if high, will reduce costs and increase the net present value of accounts booked. Other key metrics include end user cardholder perception and client perception of the banking relationship.
Grow your customer base
Taken together, analysis of these metrics will help banks understand where greater marketing effort is needed and whether the products that the customer is using are fit for purpose. Beyond this, by being able to segment the customer portfolio, marketers can prioritise products and manage incentives to keep growing their existing customer base and share of budget.
Technology alone is not a sales point for any client or commercial card provider. However, the associated benefits from delivering convenience, analytics, speed and efficiency combine to improve client retention and their overall share of wallet.
Great experiences are key in the B2B environment. If a product is easy-to-use and provides added value, customers are less tempted by change. Card owners see their costs of client acquisition fall and lifetime value increase. Payments technology can deliver strong revenue growth for issuers, even within the context of budgetary constraints.
Before we get into the ‘smart’ bit, let’s recap. Tokenization is the security process that most recently unlocked the mobile payments market. All the major ‘OEM Pays’ (Apple Pay, Samsung Pay etc.,) use the technology to secure the transmission of payment data between device and terminal. The process itself however – of replacing sensitive data with unique identifiers which retain the essential information but don’t compromise security – can, in theory, be applied to any kind of transaction, from bank details, to health records, ID numbers – even to the idea of money itself.
The central idea is this: when tokenized, unlawfully intercepted payment authorization data is rendered valueless because it simply isn’t there; it is replaced by a token. This means the data can, in effect, hide in plain sight.
What is a smart token?
A smart token takes this idea a step further. It’s a regular token on steroids. It transmits the value and all the information needed to authorize the transaction together, in one go, including enhanced counterpart identity, transaction and invoicing data. It consists of three layers: an asset, a set of rules, and a state. Let’s break it down.
An asset is the source of value. Think of it as the ‘center’ of the smart token. Typically, it’s a bank account, such as your current or savings account.
Surrounding this asset are a number of rules. These rules, which can be programmed by the issuer, dictate who can access the asset, at what time, for what purpose and under what set of circumstances.
Imagine you’re buying a TV from Amazon. When you hit ‘buy’, your bank sends a smart token to Amazon which has the following rules: a €1000 payment limit and a two-week expiry date. In another transaction, the smart token issued in relation to the same asset (your bank account) could have completely different rules. If you’re buying a series of weekly Pilates classes, the token may have a six-month duration, enabling your gym to regularly draw down on that token as each class takes place.
That is the great thing about rules – they are the flexible layer that allow smart tokens to create an almost infinite number of unique and secure digital payment types at a fraction of the cost of today’s conventional payments infrastructure. Any existing payment method you can currently imagine – cash, credit card, cheques, and gift cards – can be emulated by a smart token, thanks to the rules. This is the flexibility that opens the door for banks.
Finally, a smart token has a state. This is the part of the token which tracks the value of the token according to its rules. After three months of Pilates classes, it’s the state that will record that 50% your payments have been made. The combination of asset, rules and state combine to provide banks with the power to tear up the rulebook and perform transactions faster and at a vastly reduced cost, without relying on third parties to validate the payment.
Suresh Rajagopalan, President Software Products, Financial Software and Services
The Indian market is one of the world’s fastest growing economies with US$2.2 trillion in GDP but still has more than 85 per cent of personal consumer expenditure made up of cash. Despite its growing middle class and relatively strong cardholder base of 645M cardholders, debit and credit cards usage at point of sale (PoS)) is 1.7 transactions per cardholder in India.
A principal reason for slow progress towards greater adoption of electronic payments is the absence of available acceptance locations, preventing greater usage of and spending via cards. Currently, India has an approximate 2.7M point of sale devices, resulting in spotty and underdeveloped POS infrastructure coverage. Further, the acceptance network and volume that exists is concentrated in India’s primary cities, which account for an estimated 70 per cent of terminals and spend. The India Central Bank has indicated the country needs an approximate 20M POS devices to create a card acceptance infrastructure equal in size to other BRIC countries.
Overcoming barriers to developing acceptance is a key imperative for the country seeking to further expand electronic payments. Currently, an approximate 90 per cent of non-cash payments are processed through established card network infrastructures. At the heart of the traditional POS payment acceptance network is the interchange fee averaging between 0.75 per cent and 2.5 per cent —usually charged by a consumer’s bank to a merchant’s bank to facilitate a card transaction. The rate of electronic payment acceptance is low, as the high processing fee renders the value proposition non-compelling, especially for micro and small merchants, who form the bulk of India’s retail sector, and are the most important in serving low-income consumer segments.
Aadhaar Pay leverages alternate clearing and settlement rails for person-to-merchant transactions originating at the point of sale. Rather than ride on traditional card rails, Aadhaar Pay leverages the real-time interbank network for transaction clearing and settlement. By disintermediating traditional interchanges and riding on less expensive bank rails, Aadhaar-based person to merchant payments lower processing fee and promote higher merchant uptake. The service uses Aadhaar, a unique national identity number issued by the Government to every citizen based on their biometric and demographic information, as a proxy for the customer’s bank account to facilitate transactions at the point of sale.
How it Works?
FSS Aadhaar Pay exploits three critical elements — bank accounts, mobility and digital identity — to disrupt traditional POS business models. The service leverages the universal availability of the mobile device and Aadhaar — India’s biometrically-enabled digital identity — that covers 99 per cent of the population to advance the growth of digital payments. Envisaged as an open platform, the Unique Identification Authority of India (UIDAI Stack), allows payment service providers to consume APIs, “on-demand” to authenticate customers. Besides leveraging Aadhaar for establishing user credentials, the national identity also serves as a financial address that can be directly linked to the customer’s bank account.
Any merchant with a biometric reader and an Android phone can download the Aadhaar Pay application, self-register for the service using e-KYC, and start receiving payments. Customers make payments by scanning the fingerprint and entering the amount at the point-of-sale (PoS) terminal. Aadhaar Pay uses Aadhaar APIs to authenticate the customer’s biometric credentials mapped to the social security number. On successful authentication, the transactions are routed to the customer’s issuing bank. In contrast to setting-up a POS terminal, which takes between two and three weeks, FSS Aadhaar Pay takes a few minutes to set-up. Further, the cost of the POS is 80 per cent lower than the cost of the conventional POS terminal.
Delivering a Multiplier Impact
Aadhaar Pay has a multiplier impact on the growth of the acceptance payment ecosystem by bringing quick-to-deploy, mobile-based affordable POS infrastructure to merchants whilst creating a seamless transactional experience for customers.
Specifically, it triggers a virtuous cycle of growth by:
Creating A Ready Market of 900 Million Captive Customers
Traditional acceptance networks need a large base of cardholders to be profitable. In emerging markets with a low base of carded users and unfamiliarity with digital payments, adoption remains slow. On the demand-side, Aadhaar Pay creates a ready addressable market of 900+ million customers by leveraging Aadhaar, as a primary transaction identifier. Customers can initiate payments using their fingerprint and Aadhaar number, eliminating hassles related to downloading multiple apps, swiping cards, remembering PIN/passwords, downloading e-wallets or carrying a phone.
Broadening the Merchant Ecosystem
On the acquirer side, Aadhaar Pay reshapes expensive acquirer distribution models by allowing banks to target previously under-penetrated micro-merchant segments with an efficient technology and commercial framework, easing the way for rapid onboarding and expansion of new acceptance points. The smallest street vendor, with the aid of a basic 2G phone and a fingerprint scanner device, can accept digital payments. To promote rapid uptake, there are no restrictions related to transaction amount, type of business, transaction volume, time, location, demography, and goods category
Offering a Low-Cost Solution
The cost of a point-of-sale (POS) terminal in India ranges between INR 8,000 (USD 120) to INR 12,000 (USD 180); countervailing duties and taxes account for about 20 per cent of the price. In addition, the annual operating cost per terminal ranges between INR 3,000 (USD 45) and INR 4,000 (USD 60). FSS Aadhaar Pay mobile application, in comparison, can be downloaded online even on a 2G Android phone, connected to a biometric reader costing INR 2,000 (USD 30). The significant reduction in Capex and OPEX makes it an ideal solution for all merchant segments, especially micro-merchants with a small turnover and low transaction volumes.
Delivering Differentiated Added Value Services
The “secret ingredient” to engineering the digital payments transformation is software. Hardware can be replicated easily, but software and services are much harder to copy, and this is where Aadhaar Pay brings a sustainable competitive advantage. Beyond the transaction, Aadhaar Pay potentially would take on a more sophisticated, innovative approach to VAS. Merchants, big or small, could benefit from a complete packaged business solution, with the ability to customize specific components. This includes:
support for QR codes
ability to dynamically configure offers and discounts
electronic invoices
analytics and reporting: to sift through payment transactions and make recommendations to merchants for optimal inventory ordering or delivering offers to customers based on buying patterns and preferences.
Settling Transactions in Real-Time
In the traditional interchange four-party payment models, settlement follows a typical T+1 cycle. Aadhaar Pay uses the bank account as a source of funds and all transactions are cleared and settled using the IMPS network (India’s real-time fund transfer network), ensuring immediate crediting of accounts, freeing funds and lowering working capital requirements for merchants.
Lowering Fraud Liability
As AadhaarPay leverages the bank account, it offers a low-risk product, with usage directly linked to the availability of funds in the customer’s account. For acquirers, there is no direct credit risk involved in processing transactions. This significantly lowers fraud liability and enables on-boarding of merchants traditionally deemed high-risk under the conventional acquiring models.
Whilst the service is in the initial rollout stages, Aadhaar Pay removes the multiple layers of friction that, merchants and customers encounter whilst making payments. For banks in India, who have recently opened Jan Dhan (no frills) accounts for the low-income demographic, a broad-based acceptance network would prevent instant encashment and improve the circulation of money in the digital format. Further, with the regulator waiving merchant fees, Aadhaar Pay would help to develop sustainable acceptance that can enhance and fast-track the benefits of electronic payments.
Taking an early lead in the market, FSS launched Aadhaar Pay in April 2017. Currently, one of India’s top merchant acquirers, with an approximate 20 per cent share of the total POS market, has implemented Aadhaar Pay.
Sources
JM Financial Report Card Penetration in India; March 2016
Reserve Bank of India; ATM POS Statistics; June 2017
World Bank, India Report — https://data.worldbank.org/country/india
Notes
A small merchant fee may be levied by UIDAI in the days ahead
Banking is steeped in tradition – particularly when it comes to image. It is hard to think of a dress code that evokes a stronger stereotype than the Gordan Gekko red braces, pinstripe suit and shiny silver cufflinks. But change is afoot, as a new wave of button-loosening fintech firms enter the market – and it is not just the dress code they are changing, it is also the old ways of working.
It is not wholly surprising that the wave of digitisation sweeping the industry has been met with a degree of caution by many senior figures. C-level execs find themselves leading new teams from a generation far more familiar with the technology, and it can be difficult to create a culture of digitisation from the top down.
Adapting to these digital changes and confronting them with efficient solutions across all lines of business is key to ensuring banks remain competitive. Bringing digital capabilities up to speed has become essential to a banks’ ability to adapt to the new market dynamic. However, the level of research and planning required to implement new services puts large banks at an immediate disadvantage. After all, the same rules don’t apply to smaller, younger, more technologically savvy companies without decades of technology debt to carry around. Moving too slow into digital may mean that the damage has already been done and the bank lost out on market share.
Integrated digitisation is necessary
Efforts to digitise can be seen across the industry – voice passwords, user-friendly apps and robo advisers are all positive steps. But for its full potential, digitisation needs to be incorporated throughout, not just in the customer facing channels. Integrating front-to-back technology frees up resources and streamlines business. Scanning paper into a PDF, for example, is not “digital” as it perpetuates content that cannot be easily processed by computers. Encouraging clients to use smart forms and submitting electronic orders, on the other hand, is clearly a better way forward. On top of this, c-level execs need to ensure that they and their employees have an understanding of new technologies while also encouraging innovation in day-to-day activities so that fluidity becomes the norm, taking a leaf out of tech giants books.
A key issue remains as to what the most effective way is to implement digital transformation. Banks who retain a quarterly ‘water-fall’ release cycles find themselves quickly behind the curve. This is why an ‘agile’ approach to IT solutions delivery and change is essential, asking project and IT operations teams to carry out small but very frequent modifications in an iterative process. This calls for a change in the business operating model, bringing the relationship and level of involvement between business and IT much closer to each other. It is a learning curve both ways and takes time to master. Business needs to accept that daily work with agile IT teams is part of their job. IT needs to learn to be much more business savvy. This is a cultural change that needs to be supported accordingly.
Modern technology is like fintech workers are to banking attire, very different from 10 or 20 years ago when many, if not most, current banking platforms were designed. The underlying database and application technologies, and the fundamental engineering behind them, have little to do with how firms such as Amazon, Google and Apple run their IT today. Few IT departments are fully up-to-date on the latest engineering options that could be used to build systems in more efficient and fast ways. As a case in point, the databases and integration fabrics underlying “big data” platforms can be used for building business applications in addition to analytics. All this requires mindset and skillset changes in IT. Going agile, without changing at least some of the technology platforms used to build and operate business applications, is akin to driving in the first gear only. You can get going, but you will not get far fast.
In this article, Fraedom chief commercial officer Henry Pooley shares his top five tips to help banks get more value from their commercial card programme.
1. Embrace Client data
If banks are going to begin to capitalize on opportunities within the fast-growing commercial banking sector, they must begin to achieve a fuller understanding and more comprehensive insight into their clients’ purchasing patterns and trends.
Client data is a tool that cannot afford to be underutilised, it allows banks to monitor parameters such as ‘Average Transaction Value’ (ATV) and ‘Spend Per Account’ (SPA), allowing them effectively to create an in-depth ‘DNA’ of each client. In turn, this enables them to identify potential commercial card opportunities and ultimately maximise the return on investment they can extract and solve any underlying issues such as high delinquency rates.
2. Simplify the payment process
By making the commercial card payment process easier and offering added value such as improvements to working capital, banks can strengthen the hand of the CFO by allowing them to clearly see the true benefits of using this method of payment – which will increase expenditure flows
Issuing banks must realise that by enhancing the technology used to support these schemes both from the end user and back end perspectives, they can help to drive up revenues.
Currently, many banks are falling short in this respect. Even larger institutions that may have commercial card programmes worth billions of pounds annually, often do not have any systems in place to analyse overall spend per account.
3. Transparency
Transparency is always highly valued, yet remains rare in the world of commercial finance. CFOs struggle to manage the constant stream of time consuming reporting techniques from different sources.
Issuers that can clearly highlight and track spending so CFOs can see at-a-glance where spend is happening, identify trends and dial up or down approval controls help deliver transparency and trust where it is most required. Payments automation and the ability to capture all spend types, not just card-based, makes financial tracking easier and more efficient, finding sources of non-compliant spend (leakage) and enabling financial directors to act quickly.
Even beyond this focus on the brand, banks have the potential to leverage enhanced technology to underpin their commercial card offerings and to use that to drive critically important customer analytics
4. Track the key metrics
Spend per account, average transaction value, operational costs and profitability are all key metrics for a bank to track to improve card delivery and performance in this area while also enhancing client engagement.
A higher SPA is likely to mean improved profitability and ROI for the issuer, greater client satisfaction with the product and better client references. Higher average transaction value (ATV) scores generally result in greater profitability for the issuer. Moreover, tracking operational costs help identify controllable costs which can be rapidly minimised without impacting service levels while monitoring profitability helps to pinpoint immediate opportunities to extend the surplus of revenue over costs.
Added to this, the technology also offers the opportunity to track further metrics from delinquency rates which if kept low offer the potential to increase issuer profitability and end user ROI to client retention which if kept high will substantially reduce costs.
5. Customers love a great experience
While technology might not be a direct selling point for any client or commercial card issuer, the associated benefits from delivering convenience, analytics, speed and efficiency cannot be underestimated.
Great experiences are as important in the B2B environment as they are in B2C sectors. If a product is easy to use and provides added value, customers are far less tempted by change. Card owners see their costs of client acquisition fall and lifetime value increase. Payments technology can deliver strong revenue growth for issuers, even within the context of budgetary constraints.
I do not pretend to be an expert in Distributed Ledger and Blockchain technology, however, I do see the huge potential in it. Although, in my opinion, currently only a select few can truly understand how the technology works and its applications, the same can be said about the internet, mobile phones and computers, back in the day. We live in an age where data is king and any move to protect that a good one, surely?
As mentioned, I do not hail from Silicon Valley and my first language is not Javascript. My job is to look and analyse investment trends and find ways to grow and protect my clients’ wealth. It is very apparent that over the last few years, cryptocurrencies like Bitcoin and Ether have been an increasingly popular ‘alternative’ to fiat currencies. It is very difficult to get the exact figures but I think it is safe to say that there have been more first-time investors, men and women who have never invested before, in cryptocurrencies than any other asset class. But do they really know what they are investing in?
The technology, and as a result, the currencies, were originally intended to form an easy way to make payments without the middleman taking a cut of your hard earned money. How long has it taken for that to fall by the wayside? Cryptocurrency exchanges are charging around 4% to buy and sell cryptocurrencies which is completely contradictory to why it was initially developed. And so begins other people making money off the back of new technology.
You may not be so lucky next time
I have seen my fair share of tech bubble bursts so am fully prepared for what is to come. I have experienced it first hand and I have to say, it is not pretty. I was one of the thousands and thousands of people who invested heavily in these new tech companies back in the late 90s and early 00s. I was also fortunate enough to have got out just at the right time because I was buying my first property. I know the signs and what I predict is a “Cryptocrash”.
The huge valuation of the currencies are not sustainable and with previous tech crashes, we have seen drops of around 90%. We have no reason to disbelieve that this won’t happen again. Mark my words – Cryptocurrency will be the next 2001 telco crash or the 2000-2002 dot-com crash. We are seeing the same symptoms – volatile spikes and crashes, huge amounts of money being invested, huge valuations. The fact that most savvy spokespeople and investors have all said that they do not know which way this is going to go should ring a few alarm bells.
Those in their 20s have never experienced a crash in the market before so they believe the hype and drive it up even more. You learn through experience in this game and the longer you go from a crisis the higher the number of market participants have never experienced a crash – this fuels the bubble further and means when the crash comes it will be much larger.
It doesn’t end with cryptocurrencies
It is not just cryptocurrencies, companies like Monzo and Revolut are developing pioneering technology but how long will they last? How long before the technology they develop is benefitted from by others? Ask Jeeves, Alta Vista, Lycos, AOL – same thing happened – the charts look almost identical to that of Bitcoin, Ether, Litecoin. The technology behind them was pioneering, however, other people benefitted from the development and where are they now?
We are living in very interesting times and are currently entering a behavioural finance phase driven by a herd mentality. This has the potential to be catastrophic but there will be lots of opportunities available. The real value and longevity is in the technology, not Cryptocurrencies. I predict the crash happening within the next 18-24 months. In the meantime, ride the wave but be prepared to cash out.
Since its invention 50 years ago in the UK and in Sweden, the ATM has become a friendly robot cashier to millions of cardholders worldwide. With an installed global base of over 3.2 million ATMs and a new one arriving about every 3 minutes, it has changed the way money is distributed and managed forever; automating cash distribution and account access on a monumental scale across all seven continents, including Antarctica.
The ATM has always been at the forefront of automation, born to provide convenience. Now it stands on the threshold of reinvention. In the next few years, the ATM will undergo an extreme make-over, from its interface to its operational software.
The core concept of ATMs is shifting from simple vending to smart banking. In an era when a leading nation like the UK has lost half of its bank branches since 1989, and with the decline in bank branch numbers accelerating since the 2008 financial crisis, the ATM needs to evolve into a branch in a box, fulfilling most of the transactions which today can be carried out in a branch, including applying for a new bank card. ATMs, in short, are becoming smart consumer banking touchpoints.
There’s a vast array of account-related functions currently available at ATMs including balance inquiries, mini statements, statement requests, account transfers, PIN management, chequebook ordering, money remittances, funds transfers (both international and national), new account opening and the securing of loans and mortgages. The ATM is well on its way to becoming a bank in a box, complete with virtual tellers connected to the customer through video conferencing. CaixaBank ATMs in Spain, for example, now offer about 200 different transactions.
I don’t think the bank branch will ever be a dinosaur but in future, there will be far fewer branches, and those that remain will be mostly smart, retail-style places with video teller services, robot-advisers, self-service devices and a handful of customer services personnel doing the high-level selling. Metro Bank, for example, often uses the term “store” rather than a branch. David Smith, Business Development Manager of Auriga, a leader in branch transformation strategies based on software re-engineering, sees these retail bank branches as essential for maintaining a relationship of trust with customers.
In this evolving context, ATMs will continue to automate convenience, becoming ever more intelligent. That’s because they will be linked to APIs (Application Programme Interfaces) and Cloud architecture, which will greatly expand the services they can provide. In addition to these powerful levels of software, there will be payment hubs to enable different kinds of payments through the ATM. There will be account management hubs where a customer can carry out a range of transactions such as managing insurance policies, mortgages, funeral policies, loans, etc. The new generation of ATMs will even be able to use AI via the Cloud to secure systems against hacking and to provide the capacity for “Big Data” analysis.
ATMs will need to stay competitive in their transaction time, especially in light of faster payment initiatives by numerous national payment systems around the world. While the ATM knows how to deliver convenience, the ATM industry is currently gearing up for increased demand for quick, efficient and convenient services in its new global initiative of agreeing to an industry blueprint for its next generation of products. I can attest that a wide degree of consensus on this blueprint among major vendors, banks and independent operators has already been reached. We foresee an increasingly interoperable API ecosystem supporting an App based model for ATMs which connect to customers through mobile devices.
While the ATM is fast becoming a Consumer Banking Touchpoint, it still carries out the original goal of its co-inventor, John Shepherd-Barron, which was to issue cash around the clock outside of traditional bank opening hours. With a bright future ahead for the ATM, and cash in circulation growing at rates significantly higher than average GDP rates, cash is definitely isn’t going into the museum in this generation or the next.
by Michael Lee, CEO of ATMIA and Full Member of the Association of Professional Futurists (APF)