The financial services industry has changed significantly over the past years, and technology has been at the heart of that change. Heightened competition and rapid progress in disruptive technologies have brought about a paradigm shift in the banking experience which has accelerated in 2018.
Banks that don't invest in technology risk falling behind, as new regulation continues to level the playing field with new innovative players. Last year, many of the banks appealed to the CMA for an extension for the Open Banking initiative[1][1]. A number of banks are reaching the end of their extension period which obliges them to give banking customers more control over their financial data by allowing them to share it with challenger banks and FinTech firms.
The introduction of the open banking initiative across Europe opens the floodgates to competition - as PSD2 balances the scales between banks and digital players, banks are directing resources towards digitally transforming their operations and services.
Lloyds Banking Group recently launched a £3bn investment in a three-year strategy to strengthen its digital capabilities. It aims to slash costs to less than £8bn by 2020 and transform the banking experience for their end-customers.[2][2] The bank is driving capital towards technology and its staff to compete against mounting pressure from other traditional banks, challenger banks and FinTechs.[3][3]
Talent and human capital provide the best value and return on investment for banks looking to diversify their digital offerings. Investment in talent and digital skills goes hand-in-hand with investment in technology solutions to help banks become more fluid and responsive to changing customer behaviours.
In a world where everything is accessible at the click of a button, customer expectations need to be matched by the experiences created by banks. Earlier this year, USB found that online banking has overtaken visiting branches for the first time. The study found 52% of all consumer transactions are now done online, making it the primary method of banking.[4][4]
Bank branches are expensive with most retail bank branches costing banks between 40-60 % of total operating costs.[5][5] The cost savings from a reduced number of branches can be redirected towards investments into creating digital banking experiences that accommodate evolving customer habits.
With introduction of new financial technologies, the way in which people manage their money has shifted dramatically. However, the current potential of the UK financial services industry is restricted by the lack of tech and digital talent available. Firms are spending record amounts, with 85% of business executives allocating up to a quarter of their total budget to digital transformation in 2018.[6][6]
Digital Transformation goes beyond moving traditional banking to a digital world. A digital strategy is no longer limited to the IT department. In the current business environment, it transcends every aspect of a business and drives long-term success. In order to digitally transform, banks need to adopt a digital mindset. This means fostering a culture of innovation. It’s about going beyond the hype of digital trends and the latest buzz words and identifying the business impact on operations and service delivery.
Most banks still run on core systems installed in the 1970s and 1980s.[7][7] These enterprise structure are made up of a patchwork of systems with limited functionality for the current digital landscape. Fintech and challenger banks are not hindered by these systems, and have the agility to keep pace with customer expectations, which means banks are turning their attention to their business critical function and how they can re-engineer it to become more flexible.
Smart banks are taking advantage of cloud-based systems to enable staff to better communicate and interact with customers across multiple channels to accommodate all customers.
Banks definitely need to push forward with their digital strategy, but they must do so wisely, supported by a reliable digital partner. Technology is beginning to encompass all aspects of bank operations. Working with a single-source supplier that integrates digital into the DNA of the bank – from the talent to the technology solutions – is key to adopting a digital mind-set, which will support a bank’s digital transformation journey end-to-end.
[1][1] http://www.cityam.com/277814/five-uk-banks-given-open-banking-deadline-extension-cma
[2][2] https://www.fnlondon.com/articles/lloyds-puts-digital-banking-at-heart-of-three-year-strategy-20180221
[3][3] http://www.bbc.co.uk/news/business-43138764
[4][4] https://www.telegraph.co.uk/business/2018/01/10/digital-banking-overtakes-branch-use-may-fuel-closures-warns/
[5][5] http://www.economist.com/node/21554746
[6][6] http://www.digitaljournal.com/tech-and-science/technology/59-of-businesses-find-their-digital-transformation-falls-flat/article/504386
[7][7] https://www.euromoney.com/article/b143rj4dz3cd92/technology-investments-drive-up-banks-costs
Driven by his passion for technology, George Anderson founded Enterprise Engineering, Inc. (EEI) in April 1995. Throughout his career, he’s built a company that has garnered a number of honors and awards, including inclusion in the Deloitte and Touche Fast 50 and Fast 500, as well as the FinTech 100.
Enterprise Engineering works with Financial Institutions and FinTech developers to securely and reliably connect people to their money, through any channel they care to use. The company’s software products facilitate data access, aggregation and transaction processing for many of the world’s largest Financial Institutions. By brokering access to vast amounts of financial data, EEI is able to power a wide range of applications and leverage analytics that power growth for the company’s partners.
This month, Finance Monthly had the pleasure of speaking with George about EEI’s award-winning software solutions and the exciting journey that starting and running his company has been to date.
What are Enterprise Engineering’s ethics and priorities towards its clients?
Before the term ‘FinTech’ was even coined, NY-based EEI was successfully delivering financial data solutions to leading Financial Institutions. From our inception, the commitment to build ground-breaking financial software solutions has been the cornerstone of EEI. We have unparalleled customer focus, comprehensive resources, and in-depth subject matter expertise, making us a trusted adviser to many of the world’s largest banks and wealth management firms.
Today, EEI’s reputation as a world-class ‘trusted adviser’ is legendary on Wall Street. We have been in business over 22 years - not a lot of companies get to the 20-year milestone and we feel incredibly lucky to be here. We take great pride in being one of the very first FinTech companies and the pioneers of financial data aggregation.
Key attributes have led to EEI’s success, making us a standard in the industry. In any successful business, having the ability to spot talent and retain the highest caliber of individuals is key to being effective. We are proud of our incredible team and the high rate of repeat business that demonstrates the quality of their work.
Above all is our strong commitment to our clients and their future success. We understand how to build and deploy enterprise grade technology products. EEI’s products run every day, aggregating and accessing tens of millions of account records for major financial institutions without fail. Our goal is to continue to build leading-edge solutions that offer secure, competitive advantages to our customers.
Tell us a bit about the formation of Enterprise Engineering.
EEI first started as a professional services firm and even had a learning centre where we were wildly successful in teaching database courses and application development. In 1998, we developed a software product for one of our clients, a major financial institution, and our history began. Our software was built to ensure that it was rapidly deployable – a design principal behind our products since day one.
To date, EEI has delivered software solutions to the financial industry for over 20 years. These have been some of the most volatile and challenging times, but throughout our entire history, we have maintained a strong relationship with the leaders in the industry and continue to partner with the top firms as an adviser for their technical and business objectives. As CEO, I am personally involved with many of our initiatives and will continue to stay current on market conditions and technological advances.
We have developed a sophisticated software product set that integrates with personal financial management tools, SMB accounting software, tax packages, and expense management applications.
With the help of our high-level subject matter experts, we have created and deployed test and development methodologies that enable our software and professional services to be extremely complimentary.
Tell us about EEI’s growth & transformation over the years
EEI evolved from the Wall Street and Capital Markets space. Since inception, we’ve been working with complex investment and client problems. Our initial software product, EnterpriseFTX™, launched in 1998 to streamline banking by supporting all banking functions, including checking, savings, wealth management products, brokerage, bill pay and funds transfer. Today, EnterpriseFTX™ has morphed into a leading edge software product suite, which when used together, can support all products within a retail bank, wholesale bank, capital markets and wealth management – capabilities that no other product on the market has.
In the last few years, EEI has seen tremendous growth. In addition to our new customers and partnerships, we launched our next generation software solutions, which have helped revolutionize the financial services industry. Tax Navigator™, EEI’s only cross industry product with several government agencies as clients, enables automatic tax data downloads and distribution to any tax management and reporting platform. Tax Navigator™ is a subset of Commander™, EEI’s flagship product. Commander™ leverages data from a financial institution’s internal platforms to provide accurate, timely and secure automated access to financial information.
However, what truly distinguishes EEI in the industry today is our illustrious product, the Trusted Network Platform™, a cloud solution with the ability to aggregate ‘assets held away’ across multiple Financial Institutions. Often, clients distribute their total assets among multiple wealth management firms to minimize risk. With financial advisers only seeing a fragmented view of a client’s assets, it is impossible to provide holistic financial advice. Using EEI’s Trusted Network Platform™, financial institutions can now provide a secure, accurate, real-time, holistic view of their clients’ data, utilizing internal and held-away assets.
Sitting on top of all of EEI’s software products is our financial services API, the FS-API™. This was the first commercially available Financial Services API ever deployed and has capabilities well beyond the industry standard, such as money movement & bill payment. It is currently deployed in multiple financial institutions, providing secure and reliable access to financial data every day.
It’s funny, EEI is not a household name, yet there’s a good chance that the average person is using, or has used, our software without even realizing it. We work with all financial institutions, Millennium platforms, service providers and FinTechs to securely connect their clients to their money through any channel, including Quicken®, Mint, QuickBooks™, Xero™ and hundreds of other channels. We sit at the centre of the financial ecosystem, providing access to financial data to these participants, in a controlled and secure way. If you use one of these products or bank at a major financial institution, it is very likely you are using EEI’s software.
When working in an industry that is constantly changing, what do you do to ensure that you are at the forefront of any emerging developments?
It’s been quite a journey. EEI has overcome some challenging times under unprecedented conditions, but our commitment to our clients and continued innovation has led us to drive the future of financial data needs. We aggregate over $7 trillion in assets for 7 of the top 10 wealth managers and are considered experts in the financial services Industry. We have been at the forefront of the changing landscape in aggregation and digital banking. In Financial Services, traditional business models continue to be challenged by evolving customer demands, regulatory pressures and the proliferation of FinTech apps accessing data. Financial institutions need a fast and secure way of providing their clients with a single, customized view of all their financial data and the explosion of FinTech apps using data aggregation has led Financial Institutions to explore more efficient and higher-quality data access methods for their account holders. While challenging for our customers, this makes for an exciting time for EEI. We are at the centre of market acceleration in wealth management, enabling us to help our clients react to market demands and gain the competitive edge they need. Our traditional competitors have not been able to deliver the breadth of services, nor the reliability, that EEI can consistently provide.
What does the future hold for you and Enterprise Engineering? What is your advice for success in this modern tech-focused world?
Looking into the future, I am most excited about the growing API market. It’s an exciting time with lots of opportunity. Financial institutions need to be careful and thoughtful about their decisions surrounding API-based data sharing agreements. There is a lot of noise from both the big banks and the FinTechs with each using a different API standard. Big FinTech companies and large banks can deal with these one off implementations and multiple standards, but others will not be able to scale. Our goal is to standardize data sharing.
APIs are different depending on the Financial Institution or FinTech company offering them, and therefore, the implementation process is different each time. Financial Institutions should question which APIs are scalable and viable. Over time, we will not only see Financial Institutions finding it complicated to comply with the manifold standards while implementing APIs, we will also see consolidation, representing risk in the middle to their customers. To solve this predicament, we have architected the FS-API™—a real-time, multi-protocol, multi-channel API that acts as a universal connector. EEI has been developing systems for the major FinTechs and financial institutions for a long time. Our API is constructed to provide an ‘insurance policy’ and a layer of protection to anyone who is using it. If you leverage our API, you won’t worry about scale or one-off implementations – we abstract you from all of that.
You support various charities – can you tell us a bit more about your involvement in the community?
At EEI, we contribute time and resources to charitable endeavors focused on empowering communities and supporting children, families and animals. It is our privilege and responsibility to support organizations that are making a remarkable difference. Some organizations we actively support include the United Way, ASPCA, Friends of Karen, where I am on the Advisory Board, and Make-A-Wish Connecticut.
Website: http://www.joineei.com/
With one in three bank staff now employed in compliance, and financial institutions groaning under the pressure of an ever-increasing regulatory burden, 2018 is set to be the year that RegTech rides to the rescue, stripping out huge cost from banks’ processes.
In the same way that nimble start-ups introduced FinTech to the financial sector, the stage is now set for the same tech-savvy entrepreneurs to apply the latest technology to help tame the regulation beast.
The challenge is even more pressing now, with the arrival of an alphabet soup of blockbuster regulation including GDPR, MiFID II and PSD2, which will stress institutions like never before.
What is RegTech?
Deloitte has set high expectations for RegTech, describing it as the use of technology to provide ‘nimble, configurable, easy to integrate, reliable, secure and cost-effective’ regulatory solutions.
At its heart is the ability of ‘bots’ to automate complex processes and mimic human activity. And RegTech start-ups are already using robotic process automation to translate complex regulation into API code using machine learning and AI.
The holy grail of RegTech, however, is to strip out huge layers of cost and dramatically lower risk by developing and applying complex rules across all business processes in real-time, automating what can otherwise be an expensive and highly labour-intensive job. Simply put, RegTech promises to do the job faster, cheaper and without human error.
Behavioural analytics
Just like its FinTech cousin, RegTech is already being used for a surprisingly wide range of applications, for example banks are using behavioural analytics to monitor employees, looking for unusual behaviour patterns that may be a tell-tale sign of misconduct.
Brexit will also present a golden opportunity for agile RegTech start-ups whose tech solutions can adapt and transform quickly according to the new regulatory landscape, while traditional institutions struggle with the pace of change.
Unlike FinTech however, which has largely been focused on B2C solutions, RegTech start-ups have to work much more closely with traditional financial institutions. That’s because capital markets are a highly complex, regulated area, where institutions are cash-rich and where access to funding is critical if vendors want to disrupt.
Bespoke solutions
Traditional institutions are also more likely to need solutions that are specifically tailored to the challenges they face, rather than the one-size fits many approach developed by FinTechs. For example, they rely on many different data systems, and this torrent of data often makes it difficult to compile reports to deadline for regulators – a perfect challenge for a RegTech start-up.
RegTech could well be the cavalry, riding in to save the investment management industry from the increasing amount of data being produced that financial regulators want access to. A significant amount of this data is unstructured, making it difficult to process, which adds a greater level of complexity. The flow and complexity of this data is only going to increase, and with it the challenge for banks.
Financial institutions are increasingly pulling out all the stops to crunch data and meet the regulator’s next deadline and in this high-pressure environment teams are not necessarily developing the strategic overview needed to streamline their IT architecture in order to reduce operational risk.
Compliance at speed
RegTech promises to automate these processes, making sense of complex interconnected compliance rules at speed, making compliance more cost effective, while reducing the chance of human error.
It also promises to dispense with the current time lag between a period end, the collection of data by the institution and assessment by the regulator – a process that is always backwards looking.
Under the RegTech model, powered by data analytics and AI, information is in real-time and self-correcting to ensure the regulatory process remains dynamic and relevant.
The scale of the advantages promised by RegTech, are such that banks successfully harnessing its power will strip out huge amounts of cost from their processes, which can then be invested in business-critical innovation, giving early adopters a clear competitive advantage over the rest of the market.
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John Cooke, Managing Director
There's no doubt that these are strange times in the digital age. Whilst the advent of technological innovation has made it easier than ever for individuals to access products and launch businesses, for example, stagnant economic growth and global, geopolitical tumult has prevented some from maximising the opportunities at their disposal.
Make no mistake; however, the so-called “Internet of Value” has the potential to change this and create a genuine equilibrium in the financial and economic space. In this article, we'll explore this concept in further detail and ask how this will impact on consumers and businesses alike.
So what is the internet of value and how will it change things?
In simple terms, the Internet of Value refers to an online space in which individuals can instantly transfer value between each other, negating the need for middleman and eliminating all third-party costs. In theory, anything that holds monetary or social value can be transferred between parties, including currency, property shares and even a vote in an election.
From a technical perspective, the Internet of Value is underpinned by blockchain, which is the evolutionary technology that currently supports digital currency. This technology has already disrupted businesses in the financial services and entertainment sectors, while it is now evolving to impact on industries such as real estate and e-commerce.
What impact will the Internet of Value on the markets that its disrupts?
In short, it will create a more even playing field between brands, consumers and financial lenders, as even high value transactions will no longer have to pass through costly, third-party intermediaries to secure validation. This is because blockchain serves as a transparent and decentralised ledger, which is not managed by a single authority and accessible to all.
This allows for instant transactions of value, while it also negates the impact of third-party and intermediary costs.
What will this mean for customers and businesses?
From a consumer perspective, the Internet of Value represents the next iteration of the digital age and has the potential to minimise the power of banks, financial lenders and large corporations. In the financial services sector, the Internet of value will build on the foundations laid in the wake of the great recession, when accessible, short-term lenders filled the financing void that was left after banks choose to tighten their criteria.
Businesses and service providers will most likely view the Internet of Value in a different light, however, as this evolution provides significant challenges in terms of optimising profit margins and retaining their existing market share. After all, it's fair to surmise that some service providers (think of brokers, for example) would become increasingly irrelevant in the age of blockchain, while intermediaries that did survive would need to seek out new revenue streams.
The precise impact of the Internet of Value has yet to be seen, of course, but there's no doubt that this evolution will shake up numerous industries and marketplaces in the longer-term.
If cash is in decline, how does the future look for finance?
Once the preserve of banks, states and major institutions, the world of finance has seen big changes in its product offering. A huge growth in tech companies creating ways to make spending easier for both consumers and institutions has seen a shift away from banks ruling the finance industry. Cryptocurrencies have gone even further, removing the need for major institutions to even get involved with both positive and negative results.
Money comparison experts Money Guru have analysed the growing payment trends, how tech and finance have formed an unlikely partnership, and what the future has in store for our spending.
World
Payments
Currently serving as the Chairman of Illinois-based C&H Financial Services, Anthony Holder has been in the payment processing industry for over two decades. In his role, he oversees all revenue and customer operations, as well as business development and affinity partnerships for the rapidly growing company that provides online payment processing services in the United States and Canada. CHFS offers a range of products and services helping businesses through credit card processing solutions, whilst also providing CHFS Gateway, a Web-based payment gateway that allows merchants to process payments online; PCI compliance solution that allows merchants to accept credit cards, avoid fees/fines, and minimize investigative objections in the event of a data breach; and Tin compliance solutions. The company also allows merchants and mobile workforce to process payments through their mobile devices by converting smart phones into secure POS terminals; and business loans to the owners of retail, eating and drinking, and service and seasonal businesses.
This month we caught up with Mr Holder, who told Finance Monthly about his company’s journey to becoming the growing force within the financial services industry that it is today.
With an over 8000% growth rate, C&H Financial Services is one of the fastest growing privately held companies in America. As a Co-Founder, can you tell us about the company’s beginnings? How did it develop into the company that it is today?
With over 20 years of experience in our industry, we have been associated with tens of thousands of merchants, dozens of Niche Merchant Focused Associations, Chambers of Commerce, as well as hundreds of sales associates and colleagues. This pedigree in our industry, combined with the level of integrity that we operate under has honoured us the respect and admiration of these incredibly valued partners. When we launched CHFS in 2013 as our lead marketing brand, we put our names on the company. C&H is descriptive and stands for Costanzo and Holder Financial Services. James Costanzo and I launched C&H after nearly 20 years of working together in the payment processing industry. James and I are lifelong friends and business partners and complement each other greatly. While James handles Operations and organic growth initiatives, I find myself spending more time on our strategic relationships and acquisitions.
My brother David L. Holder Jr. and Michael Psaromatis also played integral roles in our growth over the years and within our strategic vertical markets.
CHFS has been privileged to process on behalf of over 8200 merchants. Those merchants have entrusted us with nearly $4Billion per year in payment card processing. With our future plans for growth and incredible M&A activity, we are confident that CHFS is approaching a Top 50 status for merchant acquirers.
As we continue to leverage our position in key niche markets, we will expand upon our offering to various retail and e-commerce segments of our industry. Our new cash discount programme will allow greater margins for our company and pump revenue back into the economy, by allowing merchants greatly discounted and in some cases completely free payment card processing.
For me, the most important aspect of our growth has been our support system. With six children at home, all under 12 years of age, I would not have been able to work the 75-hour work week, travel all over the country and work on the weekends, without my amazing wife Rochelle by my side. She is an incredibly hard-working mother and driven professional. Aside from managing a house of six children ranging from 4 to 12 years of age, Rochelle is also managing the marketing for one of our retail businesses. She is an inspiration, amazing mother, incredible partner and quite frankly, more deserving of being featured on this month’s cover.
What is CHFS’ growth strategy? How do you execute your growth plans?
CHFS has a multiple-pronged approach to growth. First and foremost; our organic growth channels that are split into several sub-categories. Our W2 sales force focuses on our strategic partnerships in several niche markets at the association and ISV level. We continue to grow our internal sales forces in California with plans to expand nationwide in 2018. Our 1099 independent contractors generate sales and referrals on a monthly basis. We continue to recruit and leverage these relationships, taking advantage of market trends or preferential pricing that attracts an independent agent to build a merchant portfolio through us. Paying accurately and timely is essential to maintaining an independent sales force.
CHFS also plans to continue leveraging our revenue to allow for strategic acquisitions. One of our goals for the 2018 is to acquire nearly $4mm in recurring annual EBITDA. We review dozens of potential acquisitions per year and pursue those with a synergistic model to our own.
Can you tell us a bit more about the payment solutions and systems that C&H Financial Services offers?
C&H Financial Services is licensed to distribute every make and model of payment processing hardware available to our markets. We remain agnostic to hardware and software preferences to fulfill the needs of each merchant. What works for a hair salon doesn’t necessarily work for a retail store front. Through our various processing platforms and Bank Sponsorships, CHFS has the unique position of never walking away from a merchant relationship because of technological hurdles. Since our inception, we have integrated with dozens of specialty management systems, catering to a wide range of niche markets; restaurant, retailers, e-commerce websites, educational and instructional facilities, automotive retailers and quick lube stations, as well as medical and dental practices. With our consultative approach to merchant services, we customise our solution to fit each market segment’s demands.
Can you tell us about CHFS’ plans for expansion worldwide?
CHFS is currently acquiring merchant accounts in Canada, Australia and New Zealand with plans to expand into the European and South American markets. Our cross-border relationships and software partners will take us into the most opportunistic areas of our Global Economy. As our partners expand into International territory, CHFS will stand ready to license and open our acquiring abilities to support their payment processing needs.
What is CHFS’ acquisition strategy? Can you tell us about CHFS’ recent acquisitions? What attracted you to these companies and what do these acquisitions mean to the future of CHFS?
Our recent and future acquisitions are all similar in nature. Our acquisition targets have a synergistic operating structure that mirrors our own. Independent sales organisations or merchant acquiring companies that have a portfolio of merchants that generate a recurring revenue based on payment processing receivables. CHFS targets those competitors that process on the same platforms as us, specifically First Data and Tsys. This allows us to seamlessly integrate customer service and technical support by routing 800 numbers and websites to our service team. While solid historical performance is important, synergistic profiles are key for a smooth post-closing integration and merchant retention. We also look at those portfolios that are comprised of similar merchants. CHFS has a large footprint in educational and instructional facilities along with retail automotive, parts, labour and service - we are also looking to target acquisitions for those acquirers.
CHFS moved offices in July last year– what was the rationale behind this decision? What has been the impact of moving offices thus far?
The new office allowed us the environment to grow and scale our operations staff and provided the cosmetic and professional presence we could be proud of. The expansion allowed us the proper support facility, training resources and staff accommodations to allow for a healthy and comfortable working environment. With over 30 full-time employees on board, this new facility will allow us to expand to over 50 team members in customer and technical support. In addition, we are happy to host individual sales agents or referral partners to our new facility for in person training seminars. Lodi is centrally located, only 45 miles South of Sacramento, and makes us a hub for sales and marketing efforts in California and throughout the country.
What further goals are you currently working towards with the company and what’s your vision for the future of its services?
We continue to expand upon our initiatives as our industry and economy evolve. While we have firm business plans and initiatives in place that we are enforcing, we review and adjust the model monthly. We will listen to our economy, our merchants and sales partners to evolve and respond to the market demands and trends. Hosting our own payment technology and software is a strong vision and initiative outlined for our future. We want to make sure that we are never leaving revenue on the table with our merchant relationships. Cross selling of products in our industry, such as check services, merchant cash advances or small business loans, gift and loyalty programmes as well as the new cash discount programme are critical for merchant retention. While our core competency is electronic payment processing, we want to ensure we become the preferred source for all merchant services.
What does C&H Financial Services do in order to keep up with technological advancements in the financial services industry?
Technology continues to be the Rutter that navigates us through this competitive and ever-evolving financial services industry. Along with security and regulatory compliance, equipment manufacturers and software developers are constantly updating the design of our payment devices and security controls. When we first started in the industry, we were providing any one of four payment terminals that offered limited reporting and data analytics. We have evolved into an Omni-channel focused service industry, taking advantage of mobile devices, EMV Chip card readers, Near Field Communicators (NFC/Apple pay), gateways offering recurring payment vaults for membership services, to POS systems that manage an entire business from accounting to marketing needs. CHFS intends to manage and host some of our own internal technology applications but will always remain on the forefront of market demands by licensing and distributing various applications to comply with market demands.
What are your predictions for the development of financial services in the future?
Technology continues to evolve at lightning speed. Advancements in biometric reading devices, wearable wallets in the form of a ring or small chip placed in the sleeve will continue to evolve into faster, more reliable ways to pay and exchange funds. Person to Person (P2P) payments will also continue to be a growing trend over the next few years as social media platforms open the ability to exchange goods and services. While the demand for faster and more reliable payment experiences grow, so must our ability to protect and secure the payment environment and exchange of data. Blockchain and cryptocurrency payments continue to be the topic of the day. As these systems and payment platforms evolve, we could all expect regulation and controls to evolve alongside it. There continues to be much confusion around how to capitalize and invest in Blockchain and crypto, but where there is confusion, there is opportunity.
We are excited for the continued growth of our industry and to continue being a growing force within it.
As CEO, how do you ensure you are directing the company in the correct direction? How do you advise your team to make the correct decisions for the company alongside clients?
While I’m a firm believer in best practices and not micro managing, I stay involved in every aspect of the company at all times. We have built an incredible support staff that has grown and evolved over the years to know and exceed upper management expectations. It is crucial to have and follow your Standard Operating Procedures (SOP). If you do not have these SOP’s outlined, you are setting your team for failure. I check in with our team on a regular basis from the entry level customer service representative to senior management, my door is always open to them. Keeping my door open is the only way to keep my ear to the ground. I encourage my team to make decisions that would empower our merchants, sales associates and staff. Empower people and they will perform for you at every level. This is how we maintain an A+ rating with our Better Business Bureau.
Everything evolves, constantly. Each new breakthrough poses heaps of new questions to which answers are yet to be discovered. One of these breakthroughs happened with fintech. Fintech, as a word, is what linguists would call a portmanteau – a combination of two separate words. In the case of fintech, those two words would be financial and technology. However, as a system or a sector, fintech is what experts would call the future.
Quite simply, when technology put its fingers in the financial services’ pie, fintech was born. We are talking about mobile payments, transfers, fundraising, cryptocurrencies; you name it. Even though fintech liberalized the whole financial system and put the power into people’s hands, the traditional financial sector felt threatened by it, and understandably so. To share our amazement with it, here are some incredible facts on the incredible growth of fintech in the last couple of decades.
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(Source: 16Best)
S&P Global Ratings does not see competition from large technology groups or "tech titans" as posing a short-term risk to its ratings on global banks, said a report titled "The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?" recently published.
While the barriers to entry in the banking industry are high, tech titans like Facebook or Apple possess a competitive edge over new entrants and upstart financial technology companies.
"In our view, banks will feel limited short-term pressure on their transaction fee income as they look set to benefit from the good medium-term growth fundamentals of card-based payments. This is despite bank revenues coming under possible threat from the recent growth of e-wallets and alternative payment methods," said S&P Global Ratings' credit analyst, Paul Reille.
We expect that tech titans' lending activities will remain targeted to merchants operating on their platforms and to segments currently underserved by banks due to profitability and capital reasons. Similarly, we believe that regulation will limit tech titans' ability to compete meaningfully with banks over customer deposits. In the long term, regulation is likely to remain a key factor deterring tech titans' efforts to increasingly offer the full financial services suite currently provided by banks. That said, banks could feel the biggest competitive threat from tech titans for activities where barriers to entry are low--such as transaction revenues, which could constrain their margins.
"In the short term, we don't expect competition from tech titans to have an immediate impact on the banks that we rate. However, in the long term, we think that they are well-placed to potentially disrupt certain aspects of the traditional banking industry value chain," said Mr. Reille.
In our view, payments is the main area where tech titans could potentially disrupt global banks. Although these firms are not posing any meaningful short-term pressure on fee income, we believe that they could leverage their strong customer bases and networks to potentially constrain traditional banks' payment services revenues in the longer term. We do not consider tech groups to pose any short-term threat to banks' lending or depository activities in the US or EMEA. In the short term, we don't expect competition from tech titans to have an immediate impact on the banks that we rate, but see them as well-placed to disrupt banking in certain areas in the longer term.
(Source: S&P Global)
As we herald a new era of banking, will PSD2 result in FinTechs challenging the dominance of traditional banking services?
13th January 2018 marked the beginning of the Open Banking era. The EU’s Second Payment Services Directive (PSD2) which took effect earlier this month forces banks to allow third parties, including digital start-ups and challenger banks, access to their customers’ financial data through secure application programming interfaces (APIs), and create a new way for customers to bank and manage their money online. If all goes to plan, PSD2’s main objective is to ensure maximum transparency and security, whilst encouraging competition in the financial industry. The Open Banking revolution aims to create a form of cooperation between banks and FinTechs – however, this doesn’t seem to be the case 18 days after the triggering of PSD2, with a number of banks that still haven’t published their APIs and incorporated the necessary changes. Naturally, the directive is good news for the FinTech sector. FinTech companies and digital payment service providers will gain greater access to high-street banks’ customers’ financial data – something that they’ve never had access to in the past. This will then undoubtedly inspire FinTechs to develop new innovative payment products and services and provide users with opportunities to improve their financial lives, whilst allowing them to compete on a more-or-less level playing field with the giants of the financial services industry, the traditional banks. Does this mean that traditional banks will need to up their game when competing with the burgeoning FinTech industry? Are they scared of it, and if not – should they be?
Traditionally, and up until now, banking has always been a closed industry, monopolising the majority of other financial services. The recent advancement of digitisation has shaken the industry, with FinTech start-ups offering alternative solutions to more and more clients across the globe. From a bank’s point of view, PSD2 will forever change banking as we know it, mainly because their monopoly on their customers’ account information and payment services is about to disappear. Banks will no longer be competing against banks. They will be competing against anyone that offers financial services, including FinTechs. And even though the directive’s goal is to ensure fair access to data for all, for banks, PSD2 poses substantial challenges, such as an increase in IT costs due to new security requirements and the opening of APIs. However, the main concern is that banks will start to lose access to their customers’ data. Alex Bray, Assistant VP of Consumer Banking at Genpact believes that a possible outcome of Open Banking is that banks could end up surrendering their direct customer relationships. If they don’t acknowledge the need for rapid change or move too slowly to adapt to the landscape, they risk becoming “commoditised payment back-ends as new aggregators or payment initiators swoop in”.
However, Alex Bray also argues that for banks to take advantage of PSD2, “they will need to find a balance between openness, privacy and data protection.” There is also a case to suggest that traditional banks who embrace and utilise the new directive to its potential could transform a potential threat into a huge opportunity. He also suggests that: “they [banks] will need to improve their analytics so they and their customers can make the most of the huge amounts of new data that will become available”. Only a well-thought-out strategy will help banks to survive the disruption to the long-established financial industry – and cooperating with FinTechs can be part of it. Alex Kreger, CEO of UX Design Agency suggests that “Gradually, they [banks] could turn into platform providers of banking service infrastructure… As a result, successful banks may lose in service fees, but they will gain in volume. Many FinTech start-ups will not only offer services on their platform, they will actively introduce innovative products designing new user experiences, thereby enriching the financial user’s journey and transforming the banking industry. This will attract new users and provide them with new ways of using financial instruments.”
Only time will answer all the outstanding questions related to the open-banking revolution. FinTech firms are expected to ultimately benefit from all these changes – however, whether the traditional banks will cohere to the new regulations quickly enough, whilst finding ways to adapt to them, remains to be seen.
With the rise of several follow ups to Bitcoin, cryptocurrencies are proliferating at a very serious rate. With ICOs left, right and centre, Bitcoin could soon be facing serious competition; or is the competition already here? Below Richard Tall from DWF explains why Ethereum could be the new kid on the block.
I was helping a client the other day, to identify some of the legal issues surrounding his cryptocurrency trading business. One of my questions to him was which cryptocurrencies he trades in - and he very kindly shared a list of them with me.
It was pretty long.
I have previously made the point that, in the last four years, humankind has invented seven times more "currencies" than the governmental currencies that already existed. The two most famous of these, to those of us not immersed in the market, are Ether - the token associated with Ethereum - and Bitcoin.
Seemingly to most, Bitcoin is a bigger beast than Ethereum. But does the latter present a threat to the former's dominance?
The present state of the cryptocurrency market
As I write this article, the market capitalisation of all cryptocurrencies has taken a hammering as they suffer further setbacks. These range from UK mortgage companies refusing to accept funds generated from cryptocurrencies as deposits for properties, to concerns about further governmental bans in jurisdictions such as South Korea.
All of the major cryptocurrencies have trended in much the same way, albeit they do different things. Ether's market cap today is about $102 billion (slightly larger than Kraft Heinz) and Bitcoin's is about $190 billion (about the same as Citigroup).
In 2017 alone, the value of Ether rose by 13,000 per cent against a somewhat modest showing of 2,000 per cent from Bitcoin. There is little point in trying to ascribe reasons to the differing levels of value increase though, as a market driven by those seeking to get rich quick is no real market at all.
Ethereum's perceived threat to Bitcoin is not a simple comparison of relative worth, then. There are essential differences to what each does and while Bitcoin is currently synonymous with cryptocurrencies in the minds of the public, as the market matures the value of both Bitcoin and Ether will be driven by factors other than the frenzied speculation which currently persists.
Crucial differences between Ethereum and Bitcoin
In reality, Bitcoin and Ethereum are quite different.
Ethereum is a computing platform which provides scripting language for smart contracts. This means that there is a blockchain upon which a number of contracts can be written and which automatically execute on the happening of a set series of events.
As with most blockchains, it is open source, which means that anyone minded to do so can use the Ethereum blockchain to write and implement smart contracts, which are simply a series of promises in digital form. A bit like a contract really, just with the word "smart" added at the front.
Ether is the unit of value deployed on the Ethereum blockchain, and consequently shares certain characteristics with Bitcoin. It is a potential store of value and is fungible between persons who perceive it to have a value.
Bitcoin is ubiquitous. It has become mainstream, can be used as a means of payment in a number of different arenas and is part of common parlance.
Technically, there are no limits to the use of Bitcoin. While it settles in a way different to dollars or pounds, it essentially does the same thing - which is not a lot, really. Money exists and it sits in our bank accounts. It may enable us to do things but in itself it does not undertake any activity.
Ethereum - more than just a cryptocurrency
As we are currently seeing, governments are starting to put restrictions on cryptocurrencies, driven not by a desire to see their citizens exchanging any particular kind of asset for another asset, but because their citizens are speculating on something which their governments perceive they do not understand.
Ether is simply a child of Ethereum. Ethereum is actually a huge computing network which enables anybody to build a decentralized application. A business, if it determined that it needed a blockchain developed solution, could employ a programmer to build that on the Ethereum platform.
Ether, while associated with the Ethereum platform, is capable of performing the same function as Bitcoin. Whether or not it does so is simply a factor of the parties to any transaction determining whether or not Ether has any value to them.
So back to the central question, is Ethereum a threat to Bitcoin? Probably not.
While Ether is clearly a competitor to Bitcoin, bearing in mind that the combined market capitalisation of both is way south of the market capitalisation of some of the world's biggest companies, there is room for both. Ether has the advantage of being associated with Ethereum, and Ethereum does what Bitcoin cannot do, and came to be because of the limitations and single function of Bitcoin.
Mainstream businesses are beginning to embrace Ethereum technology with banks and other entities using Ethereum-led solutions for things such as payment services. The biggest threat to Bitcoin remains Bitcoin itself, with the continuing creep of government regulation and the ongoing tag of financial crime driving market behaviours.
Fiorenzo Manganiello is a recognised expert in the FinTech and private equity space. With an entrepreneurial mind-set, he is currently developing an investment banking team in a Swiss private bank and he puts his energy into projects where finance boosts human capital and innovation. He is fluent in five languages and has a distinguished academic background, having studied at IMD, London School of Economics and Luiss Business School. Earlier this month, we caught up with Fiorenzo to discuss the blockchain industry and the way it impacts the private equity industry.
How a low interest rate environment impact the private equity/direct investment industry?
A low interest rate environment is particularly beneficial for PE firms, in fact, borrowing at a lower interest rate positively impacts the cash outflows in terms of interest repayments and enables them to achieve a higher internal rate of return (IRR). However, low rates bring more dry powder to PE firms and create a more competitive market. As a consequence, the valuation multiples increase and acquiring a target at an attractive entry price becomes challenging.
What’s your view on the blockchain industry?
The blockchain technology is extremely powerful and has many potential applications in our economy, society and environment. The real potential relies on the high level of flexibility provided by the platform which increases the value creation for the ecosystem. However, in today’s 4th industrial revolution, I believe that other technologies like Artificial Intelligence (AI) and Internet of Things (IoT) will have a higher disruptive potential in the coming years.
How can this technology affect the private equity industry?
The PE industry present high barriers to entry for entrepreneurs and UHNWI. A lot of paperwork is still required and GPs are more comfortable with institutional investors that are able to manage the workload. The blochchain represent an opportunity to democratise the asset class and operationalise those time consuming activities. As an example, sharing data, signing contracts and managing transactions will be more efficient and transparent.
What will be the impact on the fees structure?
The adoption of the blockchain technology will disrupt the classical 2/20 fees structure. Early adopters of the technology are already improving their operations and today are able to reduce by 50% the fee structure. As a consequence, the pressure on the fee structure is likely to continue to grow.
What do you think 2018 holds for cryptocurrencies market?
I truly believe that the market will continue to be characterized by a high level of volatility. The interest of institutional investors will move towards an asset class approach. Some improvements in the regulatory environment are expected to guarantee a higher level of investors’ protection.
To hear about FinTech and cryptocurrencies in Japan, this month Finance Monthly reached out to Kenji Hoki, Deputy Head of FinTech Promotion Support Office at KPMG Japan, who provides advisory services on financial regulations to financial institutions, as well as FinTech start-ups in Japan.
What have been the hottest topics in relation to FinTech in Japan in the past 12 months?
Not only in Japan, but globally, cryptocurrencies or virtual currencies have been what everyone’s been talking about recently. In Japan, they have been in the spotlight for a broad range of parties, including retail investors, FinTech start-ups, major financial institutions and authorities like financial regulators and central banks, while attitudes towards cryptocurrencies are varied across the sectors.
Retail Investors in Japan who trade cryptocurrencies are rapidly increasing and expanding their investments.
FinTech start-ups like a provider of personal financial management and marketplace to trade goods between users are seeking opportunities to incorporate cryptocurrencies as a mean of payment in enhancing their competitiveness.
Critical characteristic of the cryptocurrencies, when compared to traditional banks, is bypassing bank accounts to transfer money and the potential to disrupt their position in the financial industry. Large banks in Japan have plans to issue their own digital money, which can keep money flow via the account. In this context, Bank of Japan is conducting joint research with ECB on cryptocurrencies.
Japan has taken a very unique approach to emerging cryptocurrencies and has become the first country to give them legal status. The amendment of Payment Services Act (PSA) came into effect in April 2017, introducing new regulations that require virtual currency exchangers to register with the Financial Services Agency prior to setting up their exchange business.
What are the key recent developments in relation to cryptocurrencies?
Based on the amended PSA, 16 virtual currency exchangers were registered and are now subject to the regulations, while a lot of potential virtual currency exchangers are in the process of obtaining the status and are on the cue to register.
These companies include not only business operators that provide exchange services, but also various institutions, such as traditional financial institutions (banks, brokers, etc.), non-bank payment service providers, foreign virtual currency exchangers, etc. This increased interest to register highlights the potential of cryptocurrencies to become a business tool that can enhance the offerings of ordinary companies, which are not financial institutions.
New regulations have forced certain virtual currency exchangers that re not able to meet the registration criteria to close their business before the revised PSA came into effect.
As the cryptocurrency sector evolves rapidly, a study group from the Financial Council has started discussing a fundamental transformation of the regulatory frameworks in Japan - from focusing on entities like banks, securities companies, asset managers and insurance companies to functions like payments, finance and risk transfers, as well as redefining basic financial terms such as ‘money’, that will need adding ‘cryptocurrency’ to them.
Last but not least, global discussions on cryptocurrencies might affect the regulatory approach in Japan. In fact, coordinated regulations on cryptocurrencies are likely to be a priority on the global agenda for 2018. Discussing and considering how to face and use the cryptocurrencies, as well as fiat currencies, plays a new role in the future eco-system in the financial sector.
What would you say have been the best inventions of 2017 around the cryptocurrencies on an international level?
I would like to stress that these opinions are my own, and not the views of KPMG Japan.
Initial Coin Offering (ICO) could be a game changer at an international level, when it comes to shifting means of fund raising and hence, change the financial market/products (such as stocks) dramatically. A fundamental feature of ICO is to provide a broad range of parties an easier access (not easier money) to means of fund raising, in particular those who could not have had such access before ICO, including NPOs, start-ups, projects and even a divisions of a company.
These organizations and units who have had limited access to raise funds in the current financial markets can now benefit from fund raising via ICO and may facilitate innovation not only in the financial sector but in other sectors and markets too.
What have been the impediments on cryptocurrencies in Japan?
In facilitating business treating and/or using cryptocurrencies, many rules, other than regulations need to address cryptocurrencies. For example, accounting and auditing standards need to be reviewed to fit into this new environment and tax needs to be looked at too.
Furthermore, the regulations are still trying to keep up with the change. The above amendment of the PSA does not address ICO. As the sector expands continuously, differentiating digital currencies, including cryptocurrencies and fiat currencies, may be the next focus of the Financial Council and other similar organisations.
What does 2018 hold for cryptocurrencies in Japan?
Digitization in the financial sector will enter a new phase that will challenge the established systems. Banks will accelerate consideration or development of digital currencies which would be issued by themselves in order to keep the money flow in their hands.
Cryptocurrencies will be used more as a mean of payment from the current status, as opposed to an asset to invest in, while many FinTech start-ups that sell non-financial products/services are considering to add cryptocurrencies to their business model and expand the business in order to meet with users’ needs.
Token will be used more broadly to digitize existing non-financial products, while certain disciplines to sell Token without regulated intermediaries need to be introduced to the market. Distributed ledger technology might support the movement to replace certain goods like paper-based certificates with digital Token.
Any final thoughts?
In a digitized society, personal data and user interface is a critical source of competitiveness since every company, including financial institutions, has to customize its product and/or services to meet their users’ needs.
Meanwhile, digitization tends to remove the process of intermediation to deliver the products/services and payment, and bring old-fashioned processes to exchange directly between end-users.However, there’s the possibility of it falling apart both physically and electronically.
Until recently, it was impossible to transfer monetary value without trusted intermediaries and repositories who use expensive IT system and comply with strict regulations. However, distributed ledger technology enables the end user to do so directly by using cryptocurrencies as a mean of payment as well as Token as a digitized product/asset.
Financial authorities need to face that regulating intermediaries to be bypassed is not appropriate any longer in protecting users and markets.
Financial institutions need to know the above irreversible transformation and change their business model fundamentally and rapidly in order to keep up with an environment where personal data and user interface move to platformers to provide marketplace to users to exchange goods/services and monetary value instead of intermediaries.
E-mail: kenji.hoki@jp.kpmg.com
