Thursday, August 26, 2010

FinancialTech Insider has moved

For those of you that have followed financial-i's blog FinancialTech Insider and want to continue to follow it, we have integrated the blog within financial-i's redesigned web site. Go to for news and comment on issues pertaining to cash management, payments, trade finance, asset servicing and business solutions in the transaction banking space.

Thursday, April 22, 2010

What EU airport regulators can and should learn from SEPA

"The European single sky". In the wake of the volcanic ash disaster that brought European skies to a standstill, experts are calling for a more united approach across Europe's aviation regulators.

The handling of airport closures across Europe highlighted the fragmented approach that exists among European governments, airport regulators and air traffic control. Commentators now suggest that  a more harmonised approach to air traffic control and airport safety across the EU is needed.

What has this got to do with transaction banking, you may ask? Well efforts to unite Europe's skies reminded me about efforts to unite European payments under the Single Euro Payments Area (SEPA) initiative. And if SEPA is anything to go by airport regulators could have their job cut out for them.

Of course, SEPA not only tried to harmonise existing European payment schemes, but instead proposed replacing them with new pan-European schemes for cross-border credit transfers and direct debits, which end users have been slow to adopt. No one is proposing a new EU-wide airport traffic control system per se, but linking airport traffic control systems across Europe does present its challenges, and one can already hear the national politicking and objections that are likely to emerge as different national regulators and interests jockey for position.

Europe may have a single currency, but it appears that the EU is far from united when it comes to most other things and EU-wide payment mechanisms or airport traffic control systems, are no exception. While these concepts may sound good on paper, in reality they are difficult to implement and are often hijacked or impeded by parochial interests.

Wednesday, April 14, 2010

Paying the price of electronic payments

Cash is no longer king, despite the fact that for the last decade or so we have heard transaction banks bang on about the supremacy of cash, at least to corporate treasurers that are cash-rich or looking to unlock cash trapped in inefficient parts of their business.

However, a report published by the UK Payments Council, concludes that cash's reign as king is over with cash usage rising just 7% over 10 years and comprising just 59% of all transactions (down from 73% a decade ago), with more consumers using electronic forms of payment such as debit cards, online payments or contactless cards.

Unlike the US, which while declining year on year, still has some challenges in terms of weaning companies and their customers off paper cheques, by 2018 the Payments Council predicts that fewer than 1% of UK payments will be made by cheque.

Yet, with the increasing use of electronic payments whether it is debit or credit cards, ACH or online, comes the increased risk or threat of fraud, particularly as transaction volumes rise. Jim Woodworth, head of business services at payments software provider, ACI Worldwide says financial institutions need to ensure that their systems are able to support the growth in the number of electronic payments, while reducing the risk of fraud.

Nick Ogden, founder and CEO of Voice Commerce, which provides voice authentication solutions for payments, also highlighted the heightened fraud implications associated with increased use of electronic payments whether it is cards or mobile. "The threat of fraud and identity theft becomes more prevalent as hackers get better at cracking these new payment technologies," he says.

This highlights the need for the industry to devise more secure means of authentication, that are cost effective and non-intrusive for the user. So as more payments are made online, banks not only face the challenge of ensuring their legacy payments infrastructure, some of which dates back 30 years or more, is up to scratch, but also that they are able to monitor and detect potentially fraudulent transactions in real time and to ascertain someone is who they say they are when making a payment without the user having to jump through too many onerous hoops.

And as electronic solutions revolutionize the way we pay, are consumers and companies likely to place more onus not only the speed and efficiency with which they can make a payment, but also how secure it is? In other words when we shop around for payment services will security be more front of mind than it has been historically?

Tuesday, March 30, 2010

Transaction processing in microseconds?

I attended an Intel Faster City event this evening, the 17th such event, in which Intel talks about its latest faster, more efficient processors and its technology partners and customers talk about how increased processing and compute power is`helping them in their everyday business applications.

The aspect I associate most with Intel's Faster City events is firms like Nomura talking about how faster processors are helping them win the so-called arms race, by reducing latency in algorithmic trading and high-velocity Direct Market Access trading applications.

Ken Robson, chief algo trading architect, Nomura, reeled off a list of benefits his firm had gained from using faster Intel processors; putting multiple strategies on a single box, compressing ticker plants; but the thing that struck me the most was his comment that why they do not break the bank, his department pretty much has free rein when it comes to technology spend.

That contrasts sharply with the middle and back office, which as we know historically has not matched the level of technology investment that the front office has enjoyed. Yet, as the crisis reminded us, while the front office talked in microseconds, back-office risk and  reference data management systems struggled to keep up with their batch processing systems.

You don't hear reference data managers talking in microseconds, nor do you hear transaction banks or payment processors boasting that it only took them a microsecond to transmit a payment to a customer.

However, it appears that may be changing. With data management and risk management being the 'fall guys' of the financial crisis, the expectation now is that they will be among the largest areas of IT investment in the coming months as the fallout from the financial crisis forces banks to step up investment in these areas.

Nigel Matthews of Thomson Reuters told attendees at Intel Faster City that next-generation data management was not about batch processes but would be more near real time and event driven and that front-office technologies were slowly starting to penetrate the middle and back offices.

This can only be good news, particularly when it comes to reference data management and ensuring that the back and middle-office is keeping pace with what is happening in the front office. But I cannot help thinking when is the payments business likely to benefit from these technologies?

While there have been developments in reducing payment processing times, particularly with the advent of UK Faster Payments, which has reduced clearing times for low value payments from three days  to "near real time", payments are still largely batch processed.

Although not all payments are time sensitive, there are certainly customers that would benefit from speedier payments and there are certainly banks that would benefit from being able to process more transactions per second using dual or multi-core processors. So why is it that most firms are still using single-core processors?

But has the financial crisis really changed anything in terms of the clout back-office reference data managers have when it comes to getting a larger share of the IT begging bowl so they too can try and win the "arms race". We'd like to hear from reference data managers that are able to say with the same confidence as Nomura's chief algo architect, that they have carte blanche when it comes to technology spend.

Monday, March 15, 2010

Data analytics not for "rocket scientists"

We’ve all read the reports that in the wake of the financial crisis, risk management and analytics needs to move to the top of the corporate agenda and that risk managers should be viewed not as the bogeyman trying to rein in the profit-hungry trading desk’s excessive risk taking, but more as a strategic asset within the bank that has the ear of the CEO, CFO and CIO.

While risk managers within some banks did spot the early warning signs of a pending crisis, the risk models and analysis used have also come under harsh criticism in the wake of the crisis, particularly for their inability to speak to senior executives in a language that they clearly understood. In other words, if you take this level of exposure in your CDS portfolio, this, this and this will happen and oh by the way, i have sliced and diced the data for you and presented it in a rather colourful line graph or pie chart, that can be quickly read and interpreted,  not some complex mathematical formula.

What the financial crisis boils down to, notes Venkat Mullur, senior director, industry solutions, TIBCO Spotfire, is that “People who were making the decisions didn’t understand what Value at Risk (VAR) meant,” – VaR being a common risk modelling technique used by banks. “There was a cognitive gap between the model and analysis and consumers of that data,” not all of whom were mathematical geniuses.

Post-crisis I think we can safely assume there were too few so-called "geniuses" within banks, as there was a lot of exposure to things banks did not really understand. If only someone had bothered to portray the risk analysis  for them in a more easily digestible manner than perhaps they would not have been all so keen to pile into CDS. The question is what to do about it?

Going forward if all parts of the businesses within a bank are to understand the outcomes of data analysis across all lines of the business, Mullur argues that data or business intelligence needs to be presented in a more easily digestible, flexible and dynamic format.

Business users also need to be able to perform on-the-fly data analysis on a whole host of different data without having to revert back to IT. TIBCO’s answer to this dilemma is to leverage the business intelligence and predictive analytics capabilities within its in-memory Spotfire 3.1 platform. Spotfire uses a range of data visualization techniqes such as “conditional coloring and lasso and axis marking that allow for better data analysis of patterns, clusters and correlations among sets of variables. Multiple scale bar charts and combination bar and line plots can also be used to analyse unstructured, ‘free-dimensional’ data to identify key trends (see diagram).

“Spotfire allows users to analyse data in a more intuitive way and to make better sense of the data needed to predict future events,” says Mullur. Analyst firm Forrester has given Spotfire the thumbs up saying that it “puts the power of predictive analytics into the hands of any business user, with data visualizations they can understand, and a level of interactivity unmatched by traditional business intelligence (BI). That means, says Forrester, that statisticians and business analysts can “prototype, test, and deploy analytics much faster than with alternative statistical modelling environments,” such as spreadsheets, which do not easily allow for ad hoc analysis by business users.

It’s easy to see why TIBCO and Forrester are bullish about Spotfire, particularly when advanced data analytics of the past has been the preserve of “rocket scientists”. So there will be no excuses now for banking CEOs to say they did not understand the risks the business was undertaking in a particular investment portfolio or line of business when their risk or business manager presents them with colourful line graphs and pie charts of various statistical analyses they have performed.

And it is not just commercial banks that are likely to benefit. Mullur says it is also working with global regulators to help them get a better handle on risk analysis.

Friday, February 05, 2010

Sybase-Aleri deal plays to the advantage of remaining pure-play CEP vendors

I remember writing about the burgeoning Complex Event Processing (CEP) market two or three years ago when their were a handful of vendors; StreamBase, Coral8, Aleri, Progress Apama,; all vying for market share and using CEP to service different parts of the market. Some like Progress Apama were focused on CEP and its application in the algo trading space, while Aleri was more focused on the liquidity management side.

With this week's announcement that Sybase had finalised an asset purchase agreement with Aleri, the CEP pure-play market has virtually shrunk overnight. Sybase was already using Coral8's CEP in its real-time analytics or RAP platform and had a reseller agreement with Coral8.

However, Coral8 was bought by Aleri back in 2008 giving Aleri essentially three CEP products, its own, Coral8's and OHIO, the project name for its attempt to integrate Coral8 with Aleri's CEP engine. Meanwhile since 2008, Sybase had a reseller agreement  to offer the Coral8 engine and portal as a general purpose CEP platform "in conjunction with any Sybase solution globally".

There is a lot of speculation on the web about why Aleri sold up to Sybase, including an article on Wall Street & Technology speculating that maybe Aleri was having financial difficulties. However,   the truth may lie somewhere in the complicated morass of reseller agreements and the fact that having acquired Coral8, Aleri was also planning to sell its technology, which Sybase was also reselling.

The official line from Sybase this week is that the Aleri acquisition will position it as a "clear market leader in CEP" and help strengthen its RAP platform with the addition of Aleri's Liquidity Risk Management and Liquidity Management Suite.

However, some commentators I spoke to say that Sybase is unlikely to be a serious contender in the CEP space and that under Sybase's stewardship the Aleri platform could wane, which may be a problem for existing customers.

Furthermore the so-called OHIO project for merging Coral8 CEP with Aleri CEP also seems unlikely to continue. Hence why StreamBase is rubbing its hands together coming out with the statement that customers of Aleri-Coral8 or Sybase-RAP can trade-in their products and move over to its platform.

Richard Tibbetts, CTO at StreamBase, said, “It’s unlikely that Sybase will maintain four separate products.Aleri had three separate CEP product initiatives; Coral8, Aleri, plus OHIO. Sybase’s CEP product RAP is yet a fourth code base. As a result, we’ve been approached by customers of all these products and asked to provide migration strategies to StreamBase."

It seems that the  true winners out of this deal in the CEP pure-play space are likely to be StreamBase and Progress Apama. It appears that Sybase sees CEP not as the be-all and end-all on its own, but as part of an integrated offering that supports analytics and data repositories. To that extent it is unlikely to go head-to-head with StreamBase and Progress Apama on the CEP piece.

Wednesday, February 03, 2010

Clearstream no longer thinks of itself as just a depository but as a commercial bank

At the London Capital Club, Jeffrey Tessler, CEO of Clearstream International, the Luxembourg-based ICSD, painted its competitor, Euroclear, the other half of the ICSD (International Central Securities Depository) duopoly, as being in a much weaker position - directly exposed to the failure of broker/dealer clients during the crisis, a number of changes at top management level including the impending arrival of a new CEO, and still stuck in the mindset of a utility, not a commercial bank that is moving up the value chain.

One could be forgiven for thinking that old rivalries between the ICSD duopoly, which go back decades, have never really dissipated. However, Tessler was also complementary towards his Brussels-based counterparts saying that it too recognised the importance of interoperability amongst CSDs (although the jury is still out on whether Euroclear is likely to join Clearstream's Link Up Markets).

He complemented Euroclear for the work it had done in integrating the CSDs within the Euronext markets into one with its Euroclear Settlement of Euronext-zone Securities (ESES). Yet he added that  it would be difficult for Euroclear to extend its single platform concept beyond the Euronext markets, so it would have to embrace interoperability and hopefully join Link Up Markets.

When I spoke to outgoing Euroclear CEO Pierre Francotte at Sibos in Hong Kong last September, he said Euroclear was looking at Link Up Markets, but he remained non-commital. It will be interesting to see how Euroclear's new CEO, Tim Howell, approaches the issue of interoperability and Link Up Markets when he finally  takes the helm at the Brussels-based ICSD.

If Euroclear decides not to join Link Up Markets, which has built a converter for fostering interoperability between different domestic CSDs, Tessler said you could still have bilateral links in all major markets. However, from Link Up Markets' perspective its ambition is to provide a single point of access into multiple markets."We believe interoperability as a strategy going forward is the right one," says Tessler. "Regulation is moving in that direction. Instead of destroying local market infrastructure, we want to leverage the infrastructure that exists." For more on Link Up Markets as a single pipe, listen to Jeffrey Tessler.

Clearstream Banking Frankfurt, which is the German domestic CSD within the Deutsche Bourse Group, sees its membership of Link Up Markets as a way of not only fostering interoperability among CSDs, but also moving up the value chain to prepare for a much-changed world post-TARGET2-Securities (T2S), which is the new settlement platform for euro-denominated securities due to go live now in 2014.
"T2S is like taking a chalkboard and erasing everything off of it," said Tessler. "Through Link Up Markets we will be able to access multiple markets through a single window. We are transforming Clearstream Banking Frankfurt from a domestic CSD into a hub for accessing multiple CSDs throughout Europe and the world."
 But Clearstream International, the ICSD part of the business, has far loftier ambitions. Tessler says it plans to become not just a depository but a commercial global custodian like J.P. Morgan or Bank of New York Mellon that provides value added services such as Global Securities Financing, which is an increasingly successful part of its business, going from has a 22% market share in 2002 to a 51% market share.

Interestingly, custodian banks are also customers of Clearstream, and when questioned on whether Clearstream would compete directly with its customers, Tessler said regional subcustodians that acted as an intermediary between the broker and the CSD, would find their business increasingly threatened. Increasingly, he says, brokers will ask themselves, 'Why do I need a subcustodian?'

Tessler says Clearstream is winning more securities financing business than its competitor Euroclear because of its vertical integration model which combines the trading functionalty of Deutsche Bourse, with the settlement and collateral management capabilities that also exist within the group, particularly Clearstream Frankfurt's direct links with the Deutsche Bundesbank. For more on why Clearstream has been successful in the securities financing space, listen to Jeffrey Tessler.

Monday, February 01, 2010

The worst of regulatory oversight for banks is yet to come

Those of you in the banking industry that thought Barack Obama's recent announcement about limiting the size and scope of banks and their trading activities was enough to make you want to leave a job in the City and become a yoga instructor, well it seems we haven't seen the worst of the regulatory backlash against banks yet.

That is the view of Oliver Wyman's Financial Services practice and is one of the key findings in its State of the Financial Services Industry 2010 report, which was released at Davos last week. The report, which is published annually, is based on feedback from 70 financial services firms globally.

While Obama's announcement signified that the period of  "temporary leniency" by regulators to enable banks to shore up  their capital reserves and balance sheets, may be over, Oliver Wyman says Obama's announcement was not that tough on the banks. "The big question now is how the industry will interface with regulators," says David Moloney, from Oliver Wyman's Sydney-based financial services practice. For more on regulation from David Moloney, listen to this voice grab.
Jamie White of Oliver Wyman in London, said that if Obama's definition of what constitutes proprietary trading is too wide, the regulation itself could be difficult to enforce as it could be argued by some that market making is proprietary trading, although outlawing that would have a detrimental impact on the market.

Yet, Obama is perhaps missing the point by focusing so much on proprietary trading, which Oliver Wyman maintains was not the root cause of the recent financial crisis. It also questions the "excessive faith" regulators are placing on regulatory capital as a source of systemic stability. Some of the high profile casualties of the financial crisis such as Bear Stearns were deemed to have more than their fair share of regulatory capital, yet that did not prevent it from collapsing.

Oliver Wyman believes the worst in terms of regulatory aggressiveness has yet to come in the form of initial proposals under consideration for Basle III.  Obama's "mini-Glass-Steagall", which is largely US focused, will seem like a walk in the park compared to some of the proposals under consideration as part of the revision of Basle's supervisory requirements.
White says the next incarnation of Basle could end up making some lines of a bank's business impossible. For example, he says initial proposals talk about getting rid of netting, which could in effect quadruple banks' exposures.
Although we would like to think that the worst of the crisis is over and that banks are in the "convalescence" stage, Oliver Wyman's report shows that while 57% of market value losses have been recovered by financial firms since the crisis began in 2007, these green shoots may be "astroturf" as there are still high levels of consumer debt and if government support of financial services firms is withdrawn too quickly, they could relapse. Moloney said Japanese and Scandinavian examples suggest that governments maintaining equity ownership of financial institutions can go on for longer than anticipated.

Te possibility of another "relapse" in the not too distant future can not be ruled out, with 32% of CEOs surveyed in is report saying there is a 32% chance of a double dip or "W-shaped recession". Relapse risk is highest in Continental Europe, says Mark Weill of Oliver Wyman, where there are still a large number of losses on banks' books, that have not been accounted fors.

Friday, January 22, 2010

Good bank, bad bank

While financial stocks are reeling in the wake of U.S. president Barack Obama's announcement that he wants to limit the scope and size of banks and their trading activities, their must be mixed feelings amongst banks about this announcement and what it means for certain parts of the bank.

Trading, hedge funds, private equiy and  investment banking look as if they could be the hardest hit particularly as much of the U.S. government's rhetoric is around those banks that have become more than just deposit takers and are indulging in risky trading activity on their own books (and still expecting to be bailed out by the government). According to a article, one White House spokesman said that banks that received a "backstop" from the taxpayer shouldn't be able to make a profit off their own investing."

It goes back to the co-mingling of clients' funds with the banks' money, but as early newspaper reports suggest trying to disentangle one from the other could be tricky unless you clearly separate good old fashioned banking (lending and deposit taking) from proprietary trading. That smacks of Glass-Steagall.

Most banks will be reluctant to separate investment banking or proprietary trading from the rest of the bank and will argue that one feeds into the other in terms of cross-selling opportunities. After all investment banking or proprietary trading, although  high risk, made a substantial contribution to  banks' balance sheets prior to the recent crisis and in its wake.

But what does this mean for the less riskier parts of a bank's business, for example, transaction banking? Does Obama's clampdown on banks mean that transaction banking - which is less volatile and a relatively stable business in good times or bad - will become the most prized of all the banks' businesses?

We are certainly seeing that with the likes of Citi, which has divided itself into "good bank", "bad bank", putting its more core, stable and profitable businesses such as GTB into a separate unit called Citicorp and riskier non-core assets into Citi Holdings. Are other banks going to have to follow this example in order to comply with Obama's requirements? And if they don't is transaction banking in danger of being polluted or fouled by the mistakes or errors of judgement of its riskier investment banking counterparts?

Transaction banks vye for a slice of the remittances market

One aspect of the cross-border payments business that global transaction banks have failed to monopolise is remittances. Estimates from the World Bank suggest that the global remittance market increased 63% in the five years leading up to 2009 with more than $550 billion worth of funds remitted by immigrants living abroad in 2008.

Any bank can see the huge revenue potential if they are able to capture a substantial share of the global remittances market. However, the global remittances business is still dominated by non-bank money transfer providers such as Western Union and MoneyGram. One of the reasons for that is that remittances tend to touch the "unbanked" in emerging markets - people that don't have a bank account or ready access to one.

Banks, also being risk averse, have hesitated to enter this space particularly given the onerous regulatory requirements it entails for them in terms of compliance with Know Your Customer (KYC) and Anti-Money Laundering legislation. That perhaps explains why figures suggest that, in the US market at least, there are only about 100 banks that offer consumer remittance services with any meaninful volumes.

Yet, some banks like Citi and Bank of America have made forays into the remittances space, either alone or in conjunction with partner banks to offer consumer remittances at a lower cost than the traditional money transfer agencies.

Deutsche Bank is the latest entrant to this space. While it has no interest in selling remittance services to consumers directly, as part of its growth strategy for its Global Transaction Banking business, this week the German bank announced a strengthening of ties with payments network Eurogiro, which connects postal organisations globally.

Deutsche has taken an 8% equity stake in Eurogiro and plans to expand its offering to Eurogiro's network of postal organisations, post banks and othe financial institutions beyond US settlement services to encompass multicurency services. In return Deutsche gains access to Eurogiro's enviable global footprint across emerging markets without having to build a bricks and mortar presence itself.

Paul Camp, head, cash management, financial institutions at Deutsche Bank says the strategic investment in Eurogiro is part of Deutsche's Global Remittance initiative which combines Eurogiro's reach with the bank's existing capabilities as well as its plans to leverage mobile and SMS.

Camp was coy about Deutsche and banks' overall share of the global remittances space, but said its overall share was quite small  (Deutsche's share of total cross-border payments globally is 5% based on SWIFT traffic volumes) but that it was looking to grow its presence. "However it is not a risk free market," he says, "given the AML and KYC issues."

Deutsche will be relying on the partner banks and postal organisations within Eurogiro to have the right risk controls in place while it will provide them with multicurrency settlement capabilities. It is also working with mobile technology provider Luup to expand its mobile payments capabilities particularly in the B2B space. Mobile is deemed to be a useful technology in the remittances space because it allows people without bank accounts to receive money.

On the whole whoever, both banks and the money transfer agencies have been slow to leverage mobile technologies in the remittances space. They have been pipped to the post by telecom companies like Vodafone which partnered with in Kenya to launch M-PESA, a mobile money transfer system which has more than 7 million subscribers.

The banks have yet to clearly demonstrate what additional value they can bring to the remittances space, however, the gloves are off, and Western Union and MoneyGram can expect increased competition from banks, telcos and pre-paid card providers.