Financial institutions are rapidly starting or growing existing wealth and asset management businesses. In the U.S., wealth assets under third-party management have grown over the last five years by 16.8% CAGR to 2023 (Source: Statista). Wealth advisors are looking to continue to invest in and grow their wealth management businesses because they see continued growth coming from:

• Generational transfer of wealth from baby boomers to younger generations. The estimated transfer of wealth is $84 trillion over the next 20 years (per Cerulli Associates)
• Perceived risk of an economic downturn by the management of financial institutions. This would lead to significant losses in risk portfolios for the banks. However, wealth management is a fee-based business and not subject to capital losses. 

NelsonHall’s operations research finds new customer demographics can be profitably served with digitalized service delivery. These customer demographics are the mass affluent and the unbanked. Government initiatives such as India’s program to issue Aadhaar numbers to all citizens enable previously unbanked citizens to access financial services. Governments are moving towards individual retirement funding, necessitating individuals to start saving. Digitalization of service delivery allows profitable service delivery to a much larger mass affluent customer base.

Changing customer base

The growth in the wealth advisory industry is driven by a changing customer base, which has very different priorities and expectations from the traditional wealth client base. Key new customer priorities are:

• Investments that reflect the client’s values. Examples include investments that score well on ESG and transparency. Weaknesses in effective scoring and benchmarking these attributes remain a challenge
• Digital engagement with advisors. Today’s customers are familiar with digital engagement and expect to have it across their entire environment. Currently, most younger wealth management customers are unhappy with the quality and functionality of their wealth managers’ digital interaction offerings
• Digital tools to educate themselves and provide portfolio and return attribution analyses. The quality of these tools varies widely across wealth managers. Current tools are perceived as inflexible and lacking functionality
• Support for multiple family members. Wealth managers no longer interact with one founder as wealth is transferred to the next generation. As multiple family members are active in decision-making and often pursue different goals from each other, the wealth managers need to support cooperation between family members and customize services for individual needs
• Easy to understand investment strategies. Many investment advisors previously advised on complex investment strategies and structured instruments. Today, investors are looking for simpler investment strategies, such as indexing, to deliver investment performance for them.

These customer priorities and the operational challenges that inhibit them from achieving their goals are driving new initiatives in the industry to enable wealth managers to change their business models and deliver new services.

New wealth & asset management initiatives

New industry initiatives include:

• Cloud delivery for processes that execute outside the firm. Examples include shifting processes to the cloud, which supports external users, especially:  
  • Third parties such as independent wealth advisors (in the U.S., they are known as Registered Independent Advisors or RIAs) who sell services directly to the financial institution's customers. Cloud-delivered services are efficiently delivered anywhere and offer multiple solutions using APIs to accommodate the legacy solutions of the independent advisor    
  • Social sentiment collection, analysis, and reporting. Increasingly, investments are being evaluated using social sentiment as part of the analysis. Hyperscalers are delivering AI tools to support the analysis of social sentiment as part of their overall service offerings
  • Direct-to-customer data access. As clients increasingly demand more self-service, they need access to both data and AI tools to perform their custom analysis. Hyperscalers have developed ecosystems with both data vendors and AI solution vendors that customers can access to create their custom analysis 
  • Compliance services that are perceived as a non-differentiating cost. That cost can be minimized by sharing best practices and utilizing a shared environment. In the past, the industry shared best practices in industry forums. Cloud delivery enables industry participants to share infrastructure and best practices continually. Cloud also enables real-time response to threats and deadlines to be shared faster and more effectively      
• AI is being deployed to bring highly personalized offers to customers. Examples are the use of AI to:
  • Support advisors in developing investment plans for customers
  • Enable customers to shop investment offerings using self-service
  • Enable customers to do independent investment analysis
• Data management is changing from a siloed approach by investment product type to data collection, analysis, and reporting organized by customer. 

These operational transformation initiatives make wealth and asset managers directly accessible to third parties, including customers and business partners. The changes will bring many startup service providers to the wealth management industry. Ultimately, IT services vendors supporting the industry will need to be able to support the IT needs of tiny enterprises to continue effectively servicing the industry. That, in turn, will drive significant change in the IT services industry.   

The securities industry is moving towards shorter settlement cycles to reduce risk and increase efficiency. The last reduction in settlement windows in the U.S. was in September 2017 when settlements moved from T+3 (three-day settlement) to T+2. In February 2023, the U.S. SEC announced that all companies trading securities on U.S. exchanges needed to move to T+1 settlement by May 28, 2024. Canada has indicated their markets will align with this settlement timeframe and other global markets are also considering alignment. Eventually, all markets will reduce their settlement times, as they have done in previous rounds, to remain competitive globally.   

In this blog, I look at the challenge of shorter settlement cycles and how Capgemini is helping clients tackle the challenge.

The Challenge of Shorter Settlement Cycles

Reduced settlement times provide two primary benefits:

• Reduction of margin required to be posted at DTCC to insure against the risk of adverse market moves during the settlement period before security is delivered
• Increase in capital available for reinvestment in businesses, due to the above reduced margin requirements and access to settlement funds one day earlier.

However, there are risks to counterparties in implementing shorter settlement times. Major risks include:

• Shorter deadlines require greater accuracy and faster processing of trades. This means financial institutions need to increase their automation of settlement processes to reduce manual error and increase execution speed
• Trading in multiple markets, with different daily deadlines, means the effective daily deadline is even shorter for certain multi-market trades. The cost of an error and the difficulty of syncing counterparties is much more difficult than in a multi-day settlement process (and will be exponentially more difficult under a T+0 deadline). Again this places more pressure on settlement systems to be fast and accurate
• Ancillary activities, especially securities lending, are heavily impacted. Securities lending are likely to generate a higher level of fails, and fails can eliminate all the profit from the lending contract. Again, the new process will need to be robust enough to reduce fails to a level where lending activities are not driven to be unprofitable
• Trading volumes are not spread out evenly during the day. The majority of trades typically occur near the end of a trading session. Batch processing of trades under a shorter deadline is likely to have an adverse impact on the ability to affirm trades. In a T+1 environment, there is simply much less time to take most of the trade volume and process it in the window available.    

Transforming legacy settlement systems in the 12 months remaining to go-live will be difficult. Depository Trust and Clearing Corporation (DTCC), which provides clearing and settlement services to the U.S. markets, recently surveyed its clients and found that over 50% are unsure they can meet the deadline. Most will have to turn to third-party help to implement the complex process and infrastructure changes required.

Capgemini’s Approach

Capgemini has built an offering to support industry participants looking to transform their legacy environment in time for the deadline. The key components of this offering are:

• Readiness assessment: assessing the client’s legacy platform, which requires highly specialized knowledge due to the nature of capital markets' post-trade systems
• Solution design and implementation planning: designing solutions that increase post-trade automation and implement these solutions on top of the existing platform  
• Implementation: implementing a regulatory-compliant solution in an environment that is delivering high-volume ongoing services daily   
• Testing: internal testing to assure success with the custom internal platform and external testing to coordinate with industry and regulatory partners
• Post-go-live remediation: to fix flaws and upgrade solutions over time
• Managed services: ongoing support as required and/or full outsourcing.

The key success factors for these projects are:

• Effective data management, which is critical to delivering the clean data required to meet deadlines by avoiding disputes 
• Rapid automated processing to reduce manual errors
• STP to enable firms to meet regulatory deadlines.

Delivering these services successfully in a compliant fashion requires industry experience and a methodical plan to address each participant's custom environment. Achieving a compliant launch for complex custom systems in a 12-month timeframe, when over half of the participants are unsure they can meet the regulatory deadline, will require participants to use best practices as soon as they evolve within the next 12 months. 

The business impact of successfully transitioning to shorter settlement deadlines is that counterparties will free up working capital to reinvest in their businesses. Collectively this will generate greater industry liquidity and reduce transaction costs for both investors and issuers. Greater market liquidity will allow more efficient markets to put more capital in both investors’ and issuers’ pockets.     

Support from third parties will assist organizations with industry coordination and best practice adoption on this fast-track systems conversion project. Capgemini is well placed to capitalize based on its new offering and its track record in successfully assisting clients with T+3 to T+2 transition.   

It has been extensively reported that industries requiring in-person interaction, such as travel and entertainment, have been adversely impacted by the COVID-19 pandemic. Less obvious has been the impact on industries that are often typified by remote delivery. For example, the wealth and asset management industry is primarily driven by the long-term buildup of wealth and involves infrequent face-to-face meetings.

During 2020, global stock markets have recovered from the March stock market decline (but maybe relapsing in late 2020) when COVID-19 became a household word and businesses were forced to respond. However, despite its advantages, the wealth management industry is still facing strong headwinds from COVID-19 impacts. Overall, industry Q3 results for wealth management businesses have shown strong revenue performance based on strong market appreciation, but not from new business. To maintain operational strength, wealth managers will need to attract new customers and assets to perform well when future market breaks occur.

Three emerging trends can help wealth managers to grow their revenues and control their costs. These trends include:

• An emerging younger customer demographic which prefers very different methods of interaction (primarily digital and mobile interactions)
• Open banking ecosystem of vendors providing products for improved CX and a broader product mix
• Mass affluent offerings of existing product types and, in the future, increased customization of offerings for each customer (hyper-personalization). 

Many financial institutions and services vendors are grappling with ways to enhance the customer experience in partnership with human advisors. Improving the coordination of interaction between advisors and customers is a complex, highly human, challenge that firms are beginning to address. For example, Capgemini has developed its Augmented Advisor Intelligence solution to support matching the right investment advisors to individual customers by analyzing and then leverage the advisors’ traits including:

• Prospecting and compatibility scoring
• Propensity modeling
• Next-best action decisions
• Value-based segmentation
• Model financial advisor
• Best practice behavior.

By drawing on internal data (advisor past customer interactions and portfolio) and external data (customer demographics, sentiment, portfolio, and behaviors) the platform uses ML and AI to provide advisor matching recommendations, investment and portfolio recommendations, and best practice recommendations.  

The benefits for the wealth management firm include:

• Ability to assign advisors to customers based on fact-based analysis of personality, behavior, and lifestyle matching
• Ability to track and monitor advisor performance, including prescriptive analysis of problems that may be developing
• Improved targeting of outreach and customized offerings to customers, which can increase marketing campaign ROI
• Improved ongoing advisor/customer interaction by use of sentiment analysis of digital communications and improved routing allocation and recommendation options. 

The application of this platform across markets has resulted in distinctly different regional requirements, including:

• Mature markets: young people are the primary growing demographic. The focus is on developing omnichannel access to digital-based investment services for customers familiar with wealth management activities but dissatisfied with traditional delivery methods  
• Emerging markets: small business owners, often middle-aged are the primary demographic. The focus is on supporting investment into growing their businesses
• Mature Asian markets: rising young professionals are the primary demographic. The focus is on developing a set of mass affluent products that can grow in value to service the lifetime financial needs of individuals with limited or no family experience with financial products.

In short, vendors are trying to move beyond tracking and analyzing customer traits and propensities, to analyzing and changing advisor/customer interactions to optimize CSAT and business effectiveness. Enhancing human interaction will allow financial institutions to sell into a “market-of-one” effectively. These tools will enable consistent success in matching advisors to customers and reduce the cost of delivery to enable greater adoption of mass affluent wealth management offerings in all marketplaces.

Capgemini’s approach to enhancing advisor/customer interactions and relationship management provides a comprehensive approach to this challenge. It identifies stakeholder attributes, predicts behaviors, manages ongoing interactions, and evaluates ongoing relationship health. Most intelligent solutions focus on improving transactions. This type of platform enhances customer lifecycle management performance by improving communication and understanding between human beings. 

Improving efficiency and reducing manual processing of trade finance services has been a difficult challenge for over a century. However, the industry is on the cusp of a transformation which promises to standardize and automate this highly idiosyncratic, manual ecosystem. This blog identifies some of the key trends in trade finance transformation and how one vendor, Capgemini, is supporting banks in this transformation.

Trade finance industry trends

The trade finance industry is undergoing multiple, concurrent changes, including changes in participants, routes, underlying products, and communications channels.  These changes  require the underlying processes to become digitalized. However, the increase in stakeholders and process complexity inhibits the implementation of the changes required. Key industry changes include:

• Continued growth in trade finance volumes. Headlines trumpet a trade war which may end up being very temporary. However, even a trade war will drive increased trade finance activities as alternative routes require increased levels of finance to support standing up new supply chains.  Current processing is manually delivered by experts who developed their skills on-the-job. Scaling these resources, as industry volumes are expected to grow faster than the world economy, will be impossible without long lead times (more than a decade)
• Shift from product-based to services-based trade. The shift in underlying goods traded will necessitate new skills which cannot be taught on-the-job, at any scale
• Shift to usage-based contracts from ownership-based contracts. These contracts will also require new skills to process. In addition, the change to usage-based contracts will lengthen the amount of time the LOCs will remain outstanding, as well as changing the conditions for a drawdown
• Shift in shipping routes (Atlantic trade to Pacific trade, Northern hemisphere to Southern hemisphere). Trade finance practices vary by trade route. The shift of volumes to emerging routes will shift the skillsets required at scale 
• Growth in digital and omni-channels The shift of business processes to digital channels will necessitate a shift in business practices for trade to a digital environment.   

These changes necessitate the following digital transformation requirements:

• Standardize and automate processing
• Allow adaptation of processing by route and channel
• Process new underlying product types, primarily services

Below I look at two client cases from Capgemini and how both engagements addressed these three digital transformation requirements.

Top 5 global bank based in the U.S.

• Challenge: automate and enhance the processing of trade finance operations:
  • Assess and recommend a trade finance solution which would automate processing and provide “best-in-class” functionality
  • Ability to process non-traditional products.
• Scope:
  • Assess six solutions and activities at five competitor banks
  • Assess ability to process non-traditional products including open accounts, dynamic discounting, early payment, e-invoicing, supply chain finance.
• Benefits:
  • Rigorous multi-stage selection process for solution
  • Identified and selected optimum solution which automated existing manual tasks and added capability to process new product types.   

Large European bank

• Challenge: change the operating model for structured finance of commodities under conditions of changing regulation and business environments
• Scope:
  • Review documentation of as-is processes
  • Analyze unique characteristics of structured trade finance processes
  • Analyze evolving compliance requirements
  • Address stakeholder constraints/concerns
  • Develop a target operating model to digitalize the processes.    
• Benefits:
  • Reduced headcount by six FTEs
  • Reduced costs by $1.5m across APAC region
  • Increased operational efficiency.

Summary

These cases highlight how digitalization of trade finance requires automation, adaptation by channel, and enablement of new product types. The existing state of highly manual processing allows very large efficiency gains for a successful transformation. Challenges to successful implementation include:

• Many solution vendors are developing offerings, which requires expertise to assess relevancy and quality for the banks
• A bank’s business roadmap is becoming increasingly important as operations transformation must mesh with bank product services (e.g. support for open accounts and dynamic discounting). Synchronizing business and operations roadmaps requires two disparate executives teams with differing incentives and drivers to agree to compromise on their internal roadmap for the good of the organization.    

NelsonHall attended the WNS analyst conference in New York last week for a business update and to hear about their current initiatives. Here I take a quick look at WNS’ banking industry business specifically, and at how it is focused on applying FinTech to BPS delivery to support large productivity gains for its U.S. regional banking clients.

Market conditions are driving clients, especially in banking, to rethink their business models, operations, and partnerships, and WNS believes it will need to cannibalize existing business to migrate its clients to more efficient digital operations. The willingness to cannibalize revenues has shown itself recently, with double-digit banking revenue losses by quarter Y/Y for the nine months ending December 31, 2016. However, banking processing volumes have increased in North America (primarily the U.S.) and U.K., while decreasing in its RoW markets (which represent half of banking revenues). The North American market is WNS’ primary target market for banking BPS, and increasing volumes in the region indicate that a strategy requiring legacy BPS delivery to be cannibalized by digital-enabled BPS is on track.

WNS’ strategy for the banking BPS market is to focus on regional banks in the U.S. market, primarily banks with $20 Bn to $150 Bn in assets. It has developed a set of tools (TRAC) which sit on top of legacy systems, draw data from silos, and deliver FinTech functionality to relevant processes and channels. WNS has decided to focus on its existing client base to deliver FinTech BPS across a much larger footprint within the client. This has resulted in an elongated sales cycle, which has also depressed short-term growth.

The strategy has begun to pay off, as demonstrated by a contract with a long-term banking client who for many years purchased only one process, credit spreading. This client has acquired 5+ banks in the past two years and has realized it needs to consolidate operations and aggressively improve operational delivery. WNS won the client’s BPS business (another vendor has the ITS remit) and WNS will now expand its operational footprint to cover deposit operations, mortgage originations, and retain credit spreading. Further expansion of the contract is expected.

Part of WNS’ commitment to cost reduction is underpinned by a pricing model, Total Relationship Discount Model, which guarantees cost savings under a non-FTE based business model. Under this pricing model, WNS commits to a set level of cost saving (e.g. 10%). WNS can decide where it will find the savings to optimize its processing, or the client/vendor can select additional areas to pursue wider dollar savings on additional processes. If WNS does not deliver the guaranteed level of savings, it will remit the difference to the client.

In summary, WNS is pursuing the right approach in targeting a very narrow segment of the banking market to pursue FinTech-enabled BPS. This will cannibalize revenues and slow the pipeline in the short run, as WNS and other vendors such as IBM have demonstrated in the past few years. However, in the long run, successful execution of this strategy will produce rapidly growing revenues as clients consolidate vendors to ones with domain expertise in emerging technologies and its application to sub-industry specific challenges. The alternative will be long-term business decline, as the current decline in legacy BPS accelerates.

Based on NelsonHall research conducted during late 2016, I have identified three key predictions for business process services (BPS) and IT services (ITS) in the Banking sector in 2017.

1. Compliance initiatives move from industry headwind to tailwind

The first prediction is that compliance operations change initiatives will decline, and the resources released from this change will fund new revenue generation activities.

Changing bank operations procedures and execution has been the primary driver of operations projects (and the major expense) for the past three years. In 2017, this trend will reverse. With implementation of existing compliance requirements largely in place, spend in this segment would most likely have reduced in 2017 anyway, but the U.S. election has further signaled a respite for banks from new regulations.

Existing initiatives are now set to pay off for the banks. Banks have undertaken:

• Automation initiatives: primarily robotic and analytics initiatives focused on KYC, AML, and FATCA. Complete digitization of these processes now means any future changes will require AMD services, not operations services
• Third party delivery of compliance: Compliance-as-a-service shares implementation overhead and increases industry standard adoption of regulations. Third party delivery has eliminated compliance as a competitive differentiator. Future change adoption is now in third party hands
• Global standardization: Banks have shifted compliance delivery from unique systems for each market to global systems with a standard taxonomy, but configurable for each market’s unique regulatory requirements. This makes new market entry and compliance changes a matter of changing configuration, not developing a new system.

Compliance to date has been a cost sink, which has delivered no differentiation or revenue. However, because most compliance initiatives have focused on customer acquisition requirements, banks are now able to turn those compliance capabilities into customer acquisition drivers. With reference to the three areas above, customer acquisition can now be driven with:

• Automation, used to drive down TAT and enhance customer experience
• Third party delivery, used to segment clients and markets, where high priority clients/markets are delivered by retained organizations and lower scale/priority ones delivered by third party vendors
• Global standardization, increasing brand integrity for existing customers and providing the same experience for new customers.

In essence, banks will be able to create a ‘one brand’ experience for a much larger audience.

2. Revenue generation becomes the top industry priority

The second prediction is that banking BPS vendors will develop multi-service capabilities to support clients in new revenue generation.

Banks can only reduce costs so much on a shrinking base of revenues. In 2016, banks have started to focus their attention on increasing revenues, while reducing marginal variable cost per unit of marginal variable revenue. The great game of 2017 is shaping up to be one of how to find opportunities for good marginal cost/revenue gains, and then execute against those opportunities. Key initiatives that BPS vendors are working on include:

• Automation and FinTech initiatives: Due to the low cost enabled by increased automation and enablement of much lower cost delivery methods (i.e. digital channels versus brick & mortar channels), banks are able to address previously uneconomic market segments, including lower revenue customers (e.g. mass affluent customers in private banking) and lower revenue markets (e.g. small country entry and/or lower potential revenue product offerings). The remaining challenge, now that banks can technically address these opportunities, will be for banks and vendors to understand the peculiarities and demands of these new customer, market, and product segments
• Improved customer experience: Lowering the cost of customer acquisition and delivery reduces the barriers to entry for competitors to lure customers away. Rebuilding barriers to entry requires delivery of a unique and agreeable customer experience. This has changed the way banks and vendors address the set-up of customer experiences. The focus has been to build customer interaction operations with a ‘design thinking’ approach, which utilizes a human psychology approach to building delivery to satisfy human expectations and needs. Much has been written about this, and while it’s all the rage in the industry at the moment, it is only likely to yield results if based on quality market research and platform build.

These initiatives provide a good base for banks to build out their revenue generation capabilities in 2017, after years of languishing revenues. Banks have reduced their stable of third party vendors to reduce cost and regulatory certification of vendors. Successful vendors, therefore, will be the ones who can deliver a broad footprint of services across technologies, geographies, and customer segments.

Understanding the buying requirements of previously unbanked customers and markets is not going to be easy to do well. Most vendors will need to expand their market research capabilities to develop the insights necessary to support effective execution of this strategy. And to do that, vendors will have to pursue M&A activities.

3. M&A initiatives will accelerate to enable the shift to a pervasive FinTech structure

The third prediction is that significant mergers, acquisitions, and partnerships will emerge as the Tier 1 service providers continue to develop their digital delivery infrastructure.

To be successful in 2017, vendors will need to build out their offerings to support an emerging environment where new technologies, FinTech, are being adopted to deliver new functionality; technology which is directly related to human senses, emotions, and experience. Building such technologies sequentially would require very long lead times. The answer to that challenge is to build these technologies in parallel. Since no one organization can design, build, and run such a large infrastructure development program, many technology firms will have to focus and specialize on discrete project areas. Then, the successful ones will either merge into larger organizations or acquire other organizations. In the short run, the next two years, vendors will need to partner or acquire capabilities.

Over the next two years, M&A will focus on technologies mature enough to deliver operationally tested functionality where banks are ready to undertake widespread adoption. These technologies include:

• Machine learning: these technologies have been deployed over the last three years, and users have identified high-value use cases (primarily in customer interactions)
• Cloud delivery: IT services vendors have trialed use cases (especially where security is less of a concern), cybersecurity solutions, and delivery (primarily partnering with large vendors such as Amazon Cloudfront)
• CRM for mobility: Scaling the mobile channel cannot be done with a labor-only solution. Automation of customer mobile support has been trialed, and effective first generation solutions have been developed which will now be rolled out and developed into second generation solutions.

The next twelve months will see deployment of these technologies across borders and products. To scale the delivery of these deployments, ITS vendors will need to add labor skilled in these technologies by acquiring small specialist consulting and ITS firms. They will also need to acquire IP to fill in the gaps in IT that ISVs are missing. Examples include:

• APIs connecting legacy platforms with new technologies
• ITS automation tools focused on these domains
• Solutions that can enhance functionality, such as CRM modules providing functionality not provided in existing mobile CRM tools.

Summary

In 2017, the banking BPS and ITS industry will consolidate many of the small-scale FinTech initiatives that have been developing over the past three years. FinTech solutions remain very small-scale to date, but have been very successful in identifying use cases and developing solutions that have been successfully deployed at small scale. Over the next year, the FinTech solutions and services industry is poised to deploy at scale and to develop initial capabilities into robust capabilities. This will require aggressive scaling of resources, staff and infrastructure, and will require deepening of IP to deliver much more robust functionality that can be successful in a broader range of operating environments than has been required of these technologies to date. It is shaping up to be a fun year!

Most FinTech engagements to date, with the exception of Blockchain, have been focused on consumer banking, a business characterized by high volume, high standardization, and low value transactions. By contrast, commercial banking is characterized by low volume, high customization, and high value transactions. And from an operational perspective, commercial banking uses higher value employees to execute manual processes. However, the application of FinTech to commercial banking now provides the opportunity to automate some of the highest cost manual processes. Here I take a look at how FinTech is changing the nature of processing efficiency in commercial banking, citing a recent announcement by Genpact.

In November, Genpact announced that it will provide FinTech-enabled core banking operations services to InterNex, starting with loan origination processing, via cloud-based delivery. The contract has an initial seven-year term. InterNex is a private equity financed, startup asset-based, digital lender, and is focused on providing loans to small and medium sized businesses in the U.S. Initially, InterNex will focus on working capital loans and, over time, will expand its product set to include commercial real estate; equipment finance, and other asset-based loans.

The services use a proprietary platform Genpact has been using for the past 15 years with its asset-based lending clients, starting with General Electric Credit, its original parent. The platform is based on Genpact’s Grade origination solution and Accretive servicing solution. Today, Genpact has ~80 clients using this platform, including several F100 clients.

Genpact has adapted this solution to deliver FinTech functionality, with the following key characteristics:

• Cloud delivery (hosted with the client’s choice of cloud vendors, in this case AWS)
• All documentation is digital, no paper documents
• AI capabilities, specifically to analyze both internal transactions and compare to external benchmark data and metrics. Plus, the ability to incorporate client criteria and scoring
• Omni-channel access, especially mobile channel
• Automated credit scoring functionality to reduce TAT
• Genpact’s commitment to stand up full delivery in 100 days (60 days was achieved with InterNex)
• A robust core platform, with 15 years of use in Fortune 100 environments
• The ability to add functionality in modular fashion as required in the future
• Genpact delivering all IT and operations capability for the client with estimated overall contract costs being 80% automated processing, 20% labor processing
• Minimal up-front investment from the client, with transaction-based pricing, charged monthly, for services.

Genpact’s offering to InterNex Capital, and potentially to other startup lenders, moves the FinTech value proposition from one of mass market processing efficiency to one of custom market processing efficiency. The flexibility offered with modular configuration and cloud delivery will allow clients to add multiple niche markets at their convenience. And the ability to scale into many niche markets, at the client’s convenience, will enable clients to build sustainable moats around their businesses, at large scale. 

NelsonHall attended the IBM Forum for Financial Services event in New York this past week, which focused on how bank customers are using IBM’s cognitive offerings. IBM has been investing heavily in services and technologies to enable deeper insight into financial institutions’ customers, starting 18 months ago with the development of Watson-based analytic assets.

IBM’s thesis is that it can segment financial services customers in a better fashion than traditional institutions have done in the past. Its approach is to segment customers by their individual preferences rather than by the institution’s preferences, i.e. asking the question ‘what does the person want or need?’ rather than ‘is this a high net worth customer or low net worth customer?’. To enable this, IBM is utilizing its repository of analytic learnings and clients’ customer databases, using its dynamic segmentation tools to identify changes in customer needs based on transaction history, which then enables banks to offer relevant products to meet emerging consumer needs.

In Generation 1.0 of IBM’s customer analytics for the financial services industry, it engaged clients in around 26 PoCs to establish new customer segmentation and improve both the customer experience and the clients’ sales. Of these POCs, around18 have moved to full production. The others are not funded at this time due to required capital commitment versus hurdle rates many of these on-hold projects will be revisited now that IBM has developed a cloud-based delivery system with a lower price point than an internally delivered project.   

At the forum, IBM announced Customer Insight 2.0, part of its financial services customer analytics offerings. IBM’s new capabilities include:

• Prebuilt solutions based on experience to date
• Cloud-based delivery to lower adoption costs, including private cloud implementation to address client security issues
• APIs to integrate legacy systems into emerging technologies
• Customer prebuilt profiles (nine life event profiles based on research and PoCs to date).

A key question that the PoCs have been seeking to answer is what life events and personality traits are driving customer behavior and how can a bank support the customer in dealing with those issues. Clients buying these services from IBM have been focused on single bank product lines, but are looking to maximize overall customer retention and life cycle value. Ultimately, better cross-selling of existing customers can only succeed if those customers have a high satisfaction level. Thus, immediate sales performance is not as important as customer satisfaction. 

IBM has developed a way of looking at customers that is less institution-centric and more consumer-centric. It uses its Watson capabilities and industry experience to enable better usage of a bank’s transaction data to understand its own customers. IBM uses its dynamic segmentation capabilities to identify changes in consumer needs, which can trigger changes in buying behavior that the bank can fulfill. IBM provides the infrastructure to deliver these now productized capabilities so that banks can use them to drive revenue and, more importantly, customer retention, at a lower price point than would otherwise be possible.

While further buildout of this offering will happen, banks using it are now can begin redefining their relationships with their customers for the digital age.

Capital Markets Client with Broadridge

In this example, Broadridge is providing a post-trade utility for a global institution looking to become a primary dealer in the U.S. market, something which requires the creation of large operational delivery scale in fixed income. Provision of operational services is on a multi-tenant platform with support from U.S. fixed income domain experts.

Benefits achieved from this arrangement include:

• 35% lower TCO
• Increased STP
• Adaptability to remain current: new product offerings and reporting required for primary dealers
• Simplified connectivity to 70+ data feeds and global custodians/depositories.

Retail Banking Client with Infosys

In this example, Infosys is supporting platform renovation and providing BPS services to a major Canadian bank. The client’s challenge was three-fold:

• To identify savings from increased automation and BPS
• To transform their platform and train employees on new processes
• To reduce costs and improve process efficiency and accuracy.

Processes requiring improvement included deposit services, mortgage lending, virtual banking, wealth management, and investment services.

Benefits achieved from this arrangement include:

• Upfront cost reductions of 40% to 80% across most processes, primarily from use of tools and automation
• Significant cross-training during the transition phase
• Enhanced tracking of SLAs to provide the client with visibility into process quality
• Vendor committed to 25% improvement in process efficiency over three years.

Conclusions

In both cases, BPS vendors are supporting capital investment with technology they are using across multiple institutions. The technology is modern with an emphasis on increased automation of manual processes and STP. The multi-tenant environment ensures currency will be maintained because of demand from many tenants, and lowest cost of change due to shared overheads. The domain expertise of the vendors’ employees is enhanced by exposure to multiple clients addressing the same set of industry challenges.

The shape of operational workforces in this platform-driven approach to service delivery shifts from a pyramid shape (with the largest number of workers in the lowest skill jobs) to a diamond shape (with the largest number of workers in mid-level tasks, managing technology and robotic processing tools). Bots can scale transactions at a negligible marginal cost, allowing clients to achieve a lower TCO over an entire cycle (both seasonal and secular cycles). Cost savings are running at between 40% and 80% using this type of approach, as compared to the typical labor arbitrage cost savings of between 20% and 30%.

• HCL and CSC: Two JVs were formed, whereby HCL will operate and expand the existing Core Banking business of CSC. The first JV will focus on account management and delivery governance while the second will focus on service delivery and product development
• FIS and Sungard: FIS acquired Sungard for its wealth and asset management solutions. The combined entity will focus on selling platform-based BPS services to the wealth and asset management industry, and leverage FIS’ existing retail banking clients for upsell (FIS has seven other public solution partnerships in capital markets)
• Broadridge and QED Solutions: Broadridge acquired QED to obtain software-based investment accounting solutions which will now be delivered in a BPaaS mode
• Wipro and Viteos: Wipro acquired Viteos to provide STP and post-trade BPaaS services for alternative investment managers
• Broadridge and Direxxis: Broadridge acquired Direxxis to acquire cloud-based marketing solutions for wealth advisors.

These deals are being driven by several key business factors in Financial Services:

• Capital scarcity for both financial institutions and BPS vendors
• Requirement for IP to support process reengineering which delivers cost reduction that increases with scale (operating leverage)
• Lack of client engagement staff to support business growth and C-SAT improvements
• Willingness of clients to accept standardized services for a much broader array of processes, which will drive BPaaS adoption.

Businesses at all levels (financial institutions, ISVs, and BPSs) have limited resources to pursue revenue gains and therefore have to adopt ‘sharing’ policies to succeed. Currently, qualified labor (i.e. domain expertise and the experience to effectively use that expertise) is scarce and expensive. To solve the twin challenges of cost reduction that increases with growing volumes, and client/customer engagement, all participants need access to large amounts of labor. This can only be accomplished by sharing the scarce resource. We will continue to see partnerships and acquisitions of the types listed above for the next three years. The result of these partnerships will be the restructuring of the BPS industry servicing the Financial Services industry. BPS will become highly automated and delivered in a BPaaS fashion.

Ultimately, industry consolidation (both financial and BPS industries) will be required to realize the gains from these new IP-based BPS services. The net outcome, to be achieved over the next ten years, will be:

• Financial Services will consolidate, with ~40% fewer firms. The survivors will be buying operations on a BPaaS basis, which will deliver 40% to 50% lower cost, but more importantly greater flexibility, allowing financial institutions to enter and leave lines of business much faster than is currently the case
• BPS vendors will consolidate, with 60% to 70% fewer tier one BPS vendors delivering industry-specific processes. Lack of proprietary solutions will make pure manual delivery cost-ineffective (~40% to 50% more expensive)
• ISVs for industry-specific solutions will struggle to survive independent of the BPSs who utilize their software. Most ISVs will either partner with operations vendors in multiple geographies or will merge with one of those vendors. 

The key performance indicators for three of the largest global custodians, below, show percentage changes from Q3 2014 to Q3 2015:

• BNY Mellon:
  • Revenues (18%)
  • Servicing Fees +2%
  • Assets in Custody +1%
  • Non-Interest Expenses (10%)
• State Street:      
  • Revenues (1%)
  • Servicing Fees (1%)
  • Assets in Custody (4%)
  • Non-Interest Expenses +4%
• Northern Trust: 
  • Revenues +7%
  • Servicing Fees +7%
  • Assets in Custody +1%
  • Non-Interest Expenses +5%

Key findings from these results include:

• Overall revenues and servicing fees are flat to declining, revenues growing only in specific markets (e.g. global family offices for Northern Trust, and foreign exchange trading revenues from increased volatility for both State Street and BNY Mellon)
• Assets under custody are flat to declining, custodians with greater foreign market exposure face greater asset value headwinds, and therefore greater revenue pressure
• Non-interest expenses want to grow, but are being aggressively managed downward by successful custodians. Inability to manage non-interest expense is the key financial indicator of operational failure for custodians, since revenue growth cannot be materially increased in the short run.

The current trends will continue until there is a large change in market conditions, probably triggered by a general rise in interest rates as QE is withdrawn. In the meantime, custodians have to drive forward their business based on flat to declining revenues, and that means the successful ones are restructuring their operations. Large financial institutions are notoriously close-mouthed about operational delivery, so where are global custodians looking to adapt operations beyond headcount reduction?

Three key trends in operations outsourcing include:

• Sale of captive operations, including platforms, with agreement that the third party vendor will enhance the platform, share overheads by bringing additional financial institutions onto the platform, and run operations for the client bank as part of the engagement. An example of this is the UBS/HCL Technologies engagement
• Outsourcing of (many) compliance activities. This has been well documented in the press, and due to the 10X increase in operational costs of compliance, will continue to be a prime driver of BPS activity in financial services
• Improvement of data management and analytics.

Improvement of data management and analytics has been an unheralded area of financial services BPS, but custodians are now turning to outsourcing this area of their business. For example, one custodian has entered an outsourcing engagement across the areas of market data and sourced analytics, risk operations, and trade cost analysis, achieving benefits including 20% lower cost compared to internal captive delivery.

In another example, a custodian has outsourced data management and analytics for funds under management, achieving a 67% reduction in processing times by automating manual activities, and consistently meeting 100% accuracy and timeliness.

In summary, custodians are facing stricter operational delivery requirements under conditions of stagnant resources, and are looking to third-party vendors to support them in meeting those challenges. By utilizing BPS vendors, custodians are able to drive improvements in data quality and timeliness at reduced cost. These engagements do not show up in growing profits, but do show up in the industry, with custodians being able to move forward without financial impairment. Custodians who are slow to identify appropriate processes and move them to third-party vendors are experiencing both profit and revenue shrinkage which is faster than the industry. These conditions will not change in the short term. Indeed, rising interest rates, which are likely to bring a change in market conditions, are likely to accelerate cost pressures.

HCL is offering robotics both in the form of robotics software plus operations to its new & existing BPO contracts. HCL is typically deploying robotics in two forms:

• Virtualized workforce, directly replacing the agent with robotics (~70% of current activity by value). Here HCL estimates that 50%-70% efficiency gains are achievable

• Assisted decisioning, empowering the agent by providing them with additional information through non-invasive techniques (~30% of current activity by value) and achieving estimated efficiency gains of 20%-30%.

In general HCL is aiming to co-locate its robots with client systems to avoid the wait times inherent in robots accessing client systems using a surface integration techniques a through virtual desktop infrastructure (VDI).

The principal sectors currently being targeted by HCL for RPA are retail banking, investment banking, insurance, and telecoms, with the company also planning to apply robotics to the utilities sector, supply chain management, and finance & accounting. Overall, origination support is a major theme in the application of RPA by HCL. In addition, the company has applied robotics to track-and-trace in support of the logistics sector.

HCL currently has ~10 RPA implementations & pilots underway. Examples of where RPA has been applied by HCL include:

Account Opening for a European Bank

Prior to the application of robotics, the agent, having checked that the application data was complete and that the application was eligible, was required to enter duplicate application data separately into the bank’s money laundering and account opening systems,.

The implementation of robotics still requires agents to handle AML and checklist verification manually but applying automated data entry by ToscanaBot robots and presentation layer integration thereafter removed the subsequent data entry by agents leading to a refocusing of the agents on QC-related activities and an overall reduction of 42% in agent headcount.

Change of Address for a European Bank

This bank’s “change of address” process involved a number of mandatory checks including field checks and signature verification. However, it then potentially involved the agent in accessing a range of systems covering multiple banking products such as savings accounts, credit card, mortgage, and loan. This led to a lengthy agent training cycle since the agent needed to be familiar with each system supporting each of the full range of products offered by the bank.

While as in the first example, the agent is still required to perform the initial verification checks on the customer, robotics is then used to poll the various systems and present the relevant information to the agent. Once the agent authorizes, the robot now updates the systems. This has led to a 54% reduction in agent headcount.

Financial Reporting for a Large U.S. Bank

HCL has carried out a pilot with a large U.S. bank to address the challenges inherent to the financial reporting process. Through this pilot HCL proposes to replace manual activities covering data acquisition, data validation, and preparation of the financial reporting templates. In this pilot HCL estimates that it has achieved 54% reduction in the human effort and double digit reduction in the error rates. FTEs are now largely responsible for making the manual adjustments (subject to auditor, client and fund specs) and reviewing the Robot output instead of the usual maker/checker activities.

Fund Accounting for U.S. Bank

HCL has also carried out a pilot to address fund accounting processes with a U.S. bank. The principle was again to concentrate the agent activity on review and exception handling and to use robots for data input where possible. Here once RPA was implemented, following the introduction of workflow to facilitate hand-offs between agents and robots, the following steps were handled by agents:

• Upload investor transactions

• Review cash reconciliation

• Review monetary value reconciliation

• Review net asset value package

Robotics now handled the following steps:

• Book trade & non-trade

• Prepare cash reconciliation

• Price securities

• Prepare monetary value reconciliation

• Book accruals

• Prepare net asset value package.

This shows the potential to automate 60% of those activities formerly handled by agents.

In addition, HCL has implemented assisted decisioning for a telecoms operator, with robots accessing information from three systems: call manager, knowledge management, & billing, and in support of order management for a telecoms operator. In the latter case, order management data entry required knowledge of a different system for each region, again making agent training a significant issue for the company.

HCL’s robotic automation software is branded ToscanaBot, and as an integral part of the Toscana Suite which also includes HCL’s BPM/workflow software.

ToscanaBot is based on partner robotic software. The current partners used are Blue Prism and jacada, with in addition Automation Anywhere currently being onboarded. In the future, HCL plans to additionally partner with IPsoft and Celaton as the market becomes more sophisticated and increasingly embraces artificial cognition within RPA.

HCL aims to differentiate its robotics capability by:

• Combining robotics within a portfolio of transformational tools including for example ICR/OCR, BPM, text mining & analytics, and machine learning. In particular, HCL is looking to incorporate more intelligence into its robotics offerings, including enhancing its ability to convert non-digital documents to digital format and convert unstructured data to structured data

• Process and domain knowledge, HCL has so far largely targeted specialist industry-specific processes requiring significant domain knowledge rather than horizontal services and is working on creating add-ons for specific core software applications/ERPs, to facilitate integration between ToscanaBot and these core domain-specific applications

• Creation of IP on top of partner software products.

Within BPO contracts, HCL is aiming to offer outcome-based pricing in conjunction with robotics, but in some instances the company has just sold the tools to the client organization or provided robotics as part of a wider ADM service.

Overall, HCL may be lagging behind some of its competitors in the application of RPA to horizontal processes such as F&A, though HCL is applying RPA to its own in-house finance & accounting process, but is at the forefront in the application of RPA to industry-specific processes where the company has strong domain knowledge in areas such as banking and supply chain management.

There is widespread consensus among industry participants (capital markets firms, regulators, and analysts) recognizing the need for aggressive cost takeout. Many of the efforts to date are partial solutions that lack either or both the STP or process industrialization elements that would make cost takeout across the entire value chain possible. Examples of partial cost control efforts and the risks they incur include:

• Reduction of market liquidity: market makers require large securities portfolios to make markets. Reduction of portfolio holding costs reduce overall costs, but at the cost of increasing liquidity crises in the future
• Exiting less profitable lines of business and/or less profitable customers: capital markets are inherently cyclical. While in the short-term exits reduce cost, over longer periods of time costs of reentry are likely to outweigh short-term savings from exits. Customers are underserved both in the long- and short-term
• Improving cost efficiency within operational silos: while easy to implement, ultimately cost reduction may not be achieved, as linkages across silos reduce the value of in-silo savings
• Running lean operations: under resourcing operations without improving operational execution often leads to costly operational failures.

A major source of operational cost for capital markets firms is trading costs for asset portfolios. Post trade expenses include: exchange, clearing, settlement, and regulatory fees associated with executing a transaction. Depending on the type of portfolio these fees can run from 10 basis points (BP) to 100 BP, often averaging 50 BP.

To date, vendors looking to service the need for trade expense management have offered:

• Software: e.g. Qlik (QlikView), Fiserv (Portfolio Management and Trading), Broadridge (REVPORT)
• Platform-independent KPO: e.g. Infosys, TCS, Cognizant
• Custodians: BNY Mellon, State Street

Software requires capital markets firms (who are capital constrained) to invest in operations delivery. Platform-independent KPO vendors can work with any client, but are limited to client selection of solutions to create the data requiring analysis. Custodians, while perhaps best positioned to provide this type of analysis, are in fact creating many, if not most, of the trade expenses under review.

Vendors are looking to enhance the level of support they provide capital markets firms in controlling their trade expenses. One example is a recently launched BPS from Broadridge. The service is built on Broadridge’s 15-year old REVPORT software platform, which provides functionality for wealth managers and capital markets firms trading securities, including:

• Fee billing and expense calculation
• Invoice validation and reconciliation
• Revenue and expense calculation
• Revenue and commission sharing.

REVPORT is able to conduct these analyses and matching across:

• Multi-currency
• Multi-asset classes
• Over 50 fee types including: taxes, commissions, management performance, administrative and advisory, fund rebates, wrap fees, and revenue-sharing.

The REVPORT solution currently has 150 clients across the entire size range of wealth management and capital markets firms.  

To date, industry standard practice is to conduct trade expense validation audits by sampling ~5% of invoices. Broadridge’s managed service uses computing power and algorithms to enable the service to sample ~100% of invoices (minus any invoices with no documentation or rate card to put into the system). Broadridge claims cost savings for clients from 5% to 8% of total trade costs. Audits can be conducted retroactively to recover expenses from prior years.

Implementation and full operation of the managed service is sufficiently quick to start recovering monies within nine months. In addition, due to the highly automated nature of the managed service, clients can pursue recoveries on fees which have previously been considered too small to be worth pursuing individually.

The managed service supports clients in their quest to improve the efficiency and standardization of trading processes. The service automates data/fee capture, stores rate cards and creates a taxonomy of fees to support clients trying to understand complex fee systems and in negotiating fees with securities trading vendors. 

Broadridge targets fees for the managed service to run at ~30% below internal operations. The pricing of the service is a combination of:

• Fixed fee for base service
• Additional fee for meeting SLAs
• Percent of recoveries received (after a base level of recoveries and capped after a negotiated level).

Broadridge officially launched the service on April 13, 2015 but has been working with two clients for six months. The clients have been REVPORT software clients, and have generated cost savings to date that validate the business case. The pipeline is strong, based on the existing 150 REVPORT clients and non-REVPORT clients who have expressed interest.

Is this managed service of value to the market?

Broadridge has the financial strength, IP (REVPORT since 1999), and operations staff (both on- and offshore) to create a combined offering of technology and operations which can deliver significant cost savings to clients. Tier one capital markets firms have a trading spend of ~$1,000m to ~$1,500m. Anticipated savings for them from this type of service would be ~$50m to ~$120m. Broadridge currently has tier one clients for both the solution and the managed service.

Key benefits of this service include:

• Cost savings from improved vendor management
• Improved process efficiency and discipline
• Increased transparency of expenses.

In the next few years, capital markets firms under increasing cost pressure will need to turn to managed services like this one to help improve operations and manage vendors much better than has been industry practice to date. Capital markets firms that fail to do so, or who choose vendors unwisely, will face an extreme cost disadvantage. 

Looking at the recent financial results of six key incumbent vendors (four payment processors and two card schemes, all global vendors) highlights where the industry is going and what it takes to succeed. Below are results for the quarter ended September 30, 2014 (refer to NelsonHall’s tracking service articles for more detailed analysis).

How Payment Processors are Winning in the Current Environment

Headline results for payment processors are:

• Alliance Data: Q3 FY 2014 revenues of $1,319.1m, up 20.3 % year-on-year (yoy). International revenues grew at 23.5%
• Euronet: Q3 FY 2014 revenues of $453.4m, up 25.7 % yoy. International revenues represent almost all revenues (~90%). EFT services grew 28.6%
• First Data: Q3 FY 2014 revenues of $2,791.1m, up 2.9 % yoy. International revenues grew at 4.1%. Merchant services grew 0.3%
• TSYS: Q3 FY 2014 revenues of $552.9m, up 8.5 % yoy. International revenues grew at 12.2%. Merchant services grew 1.2%.

Vendors growing revenues (and profits) are focused on:

• Non-U.S. and non-mature markets growth
• Emerging services such as mobile payments, EFT payments (especially ATM networks in emerging markets), and P2P payments, including cross border money transfers

Among the payment processors, two vendors with winning strategies are Euronet and Alliance Data.

Euronet

Euronet's growth is the result of:

• Continuing expansion of its payments network (primarily ATM machines in India and Europe)
• Products:
  • Electronic payments in Middle East, Germany, and India
  • Money transfer, consumer to consumer, and Walmart2Walmart

The key to Euronet's success has been its ability to identify under-penetrated markets and pursue those opportunities. For example, Germany is not typically thought of as emerging, but its use of EFT is accelerating. Similarly, Walmart is a merchant with leading technology, but deployment of money transfer capabilities into retail merchant environments is leading edge in the U.S. 

Euronet should continue to grow revenues in double digits just based on its existing footprint, which is not yet fully saturated. As it develops new initiatives, its revenue growth can accelerate further. 

Alliance Data (ADS)

ADS’ growth is the result of:

• Growth of its loyalty programs in Canada and Brazil (Loyalty One in Canada, Dotz in Brazil, and BrandLoyalty/LoyaltyOne for grocers in Europe and LATAM)
• Growth of its merchant marketing programs in Europe and LATAM (Epsilon globally)
• Growth of its private card program, primarily the loan balances on the merchant clients’ private label cards)

The key to ADS’ success has been supporting clients in increasing their sales. ADS centers its offerings on marketing and sales support, driven from its proprietary technology and underlying transactions data. Payment processing, a core deliverable of ADS’ services, does not stand center stage in its value proposition.

ADS’ delivers services which are scarce in the marketplace, but not unique. For example, funding and managing card loans is especially important to merchants now that banks are withdrawing from that market. ADS is embracing this profitable business, while other participants are withdrawing.

ADS should grow its revenues in double digits by expanding into new markets in LATAM and Europe. Its Canadian market opportunities are saturated, by logo, but not by service offering. New analytics and payment types (e.g. mobile) should help drive growth in the Canadian market for ADS over the next five years.

Card Schemes Find Their Own Path to Success

Headline results for card schemes are:

• Mastercard: Q3 FY 2014 revenues of $2,503m, up 12.8 % yoy. Cross border volume grew 15% on a constant dollar basis. Total processed transactions grew 18.3% to 11.7 bn
• Visa: Q4 FY 2014 revenues of $3,229m, up 9.9 % yoy. Cross border volume grew 10% on a constant dollar basis. Total processed transactions grew 4.2% to 20.9 bn.

The card schemes face a somewhat different set of challenges because they sell highly standardized services, which are underpinned by massive capital investments, through card issuers (banks). Despite the limitations placed on card schemes by the nature of their underlying services, card schemes are finding the same drivers of success. Critical to growing the business is international markets and new services.

Mastercard has aggressively moved into emerging markets, staking out an aggressive growth strategy in Asia, Africa, and the Middle East. Key examples over the past year alone include:

• National identity card program in Nigeria with payments capabilities
• Electracard acquisition in India to expand processing services for banks in 25 countries
• Opening various delivery centers in Middle East and Asia
• Launch of a development platform in Ireland for ISVs to develop APIs and solutions for Mastercard processing services

These aggressive moves into markets and services have allowed Mastercard to grow revenues faster than Visa over the past year, and in the past quarter alone 28% faster.

Competitors Face Limited Window of Opportunity to Challenge Incumbents

In summary, the winners are moving into new markets and services. Critical new markets are emerging markets with little payments infrastructure and mature markets with legacy payments infrastructure where newer payments technologies (mobile, EFT networks) are starting widespread adoption. Establishing proprietary networks or distribution outlets (such as P2P payments) will create barriers to entry in the future and the opportunity for upsell of additional services, such as analytics.

Over the next two years, the window for competitors to catch up by pursuing these vendors will close. Already, presence in smaller countries, such as ADS in Brazil, makes it challenging for competitors to displace an entrenched vendor. Once payments vendors have created dominant market positions in major country markets, over the next five years, the payments industry will begin a consolidation phase in order to convert local leadership into multi-country leadership.  

• LSE:
  • UnaVista platform (proprietary platform which provides transactions, reconciliations, reporting, etc.) The platform overs all instrument types and is used by ~1,000 financial institutions 
  • Data center hosting of application in London based data center
  • Processing in an FCA regulated entity (the data center)
  • Data archives for ten years
• Wipro: 
  • Staffing and Infrastructure for reconciliation analytics, and automation tools
  • Access on a pay per transaction basis
  • Customization of reconciliation services
  • Third party support of reconciliation processing, including access to LSE instrument data files.

Key benefits that Wipro believes the utility can deliver to clients include: 

• 30-40% savings over internal reconciliation costs, from automation, pricing of data center capacity at spare capacity rates, and accuracy of static instrument data from LSE data feeds
• Conversion of CAPEX to OPEX, with fee per transaction pricing 
• Direct access to static instrument data for validation purposes
• Ability to scale volumes, based on Wipro staffing and delivery center infrastructure. 

Wipro is in conversations with some existing clients to roll out this service, and anticipates around four clients will commence operations in Q4 2014.

Many vendors are talking about setting up multi-tenant reconciliation utilities - and many have set up single tenant reconciliation services delivery units. But the biggest cost savings come from multi-tenant utilities. There are, however, significant impediments in their adoption: 

• Data custody: capital markets firms do not want competitors to have any chance of access to their data. Finding third parties with the requisite skills and domain experience, who are not competitors, has been a major inhibitor. Wipro and LSE are both third parties that would not become competitors to clients of this service
• Speed: reconciliation has been primarily manual labor-driven to date, with firms using an independent delivery model. With an automated delivery model, based on a common industry platform, the shared services model will be able to delivery faster TAT than is possible with independent delivery
• Transparency: member firms need to report to regulators the status of reconciliations (which have a high capital charge). Third party vendors have been unable to provide a regulated entity for reporting purposes, which means lower levels of transparency when TAT lengthens
• Standards across multiple platforms: proprietary platforms usually work within a small ecosystem of platforms only. The UnaVista platform works across all platforms, and is already in use (at least in part) by LSE market participants. 

Wipro anticipates very different adoption by client type: 

• Tier one firms adopting the reconciliation utility as a part of their overall reconciliation operations, focused on the European market
• Mid and lower tier firms adopting the service as a comprehensive reconciliation operations capability

Capital markets firms are looking for a service that addresses these inhibitors and provides lower cost. The service is offered on a transaction cost basis, which will allow clients to test the service. If execution is successful, take up is likely to be very high.

Critical to the success of this utility is the access to the exchange's core static data warehouse, feeds and platform. In this case, the exchange is the London Stock Exchange, a world premier exchange. Other vendors are likely to look to follow this model with other exchanges. However, only one vendor will succeed with each exchange. 

The EFaaS service has arisen from HCL’s Next Gen BPO tenets, namely domain orientation, innovation and improvement focused, based on output/outcome/flexible constructs, utilizing HCL’s Integrated Global Delivery Model (IGDM), and addressing risk and compliance. In particular, the EFaaS service aims to deliver business function services as utilities by undertaking elements of business operations transformation, IT standardization (e.g. SAP/Oracle transformation, unified chart of accounts, reduced reporting platforms, data warehouses etc.), platform transformation, and infrastructure consolidation and to achieve 25%-35% cost reduction within each utility. Accordingly, HCL is:

• Looking to create domain-specific global shared centers
• Use business outcome based constructs to put “skin in the game” in transforming the organization’s enterprise function
• Focusing on enhancing risk and compliance and HCL will engage with global accounting firms for SAS compliance
• In addition to cost reduction benefits, the carve-out of a business function utility aims to deliver increased business agility, enhanced controls, and faster scalability.

HCL has a five-step approach, typically spread over 24-30 months, to implementing EFaaS, namely:

• Due diligence and risk assessment, in conjunction with a Big 4 consulting partner, including developing process maps, integrated IT-BPO roadmap, co-governance model
• Process consolidation, including functional alignment, adjusting grade mix and location mix, and shared services utility creation
• Commercialization, including market assessment, asset monetization, and revenue sharing arrangement
• Carve out and transition, including carve out, transition, rebadging, and organization change management
• Platform transformation, including creating common data model, data & platform consolidation, new platform implementation and analytics.

HCL is working with global strategic partners in the development of these utilities, with partners assisting in:

• Benchmarking with world class enterprise functions
• Cost/benefits evaluation
• Performance and change management frameworks
• Stakeholder assessments and leadership alignment
• Communications strategy.

HCL initially targeted a number of major banks, all of which are looking to achieve multi-billion dollars of cost take-out from their operations. In particular, these banks typically face the following issues:

• How to carve-out non-core business functions
• How to boost their controls and put in strong compliance & control environment.
• How to manage complex IT environments typically involving use of the major ERPs plus a number of regulatory point solutions.

HCL has so far signed two contracts for EFaaS, both in the banking sector. In HCL’s initial contract for EFaaS, the contract scope covered four principal business processes within the client organization:

• External reporting, for example to the FCA and Bank of England
• Management reporting
• Cost utility, covering allocations/adjustments/accruals
• Regional and Group reporting & consolidation under U.S. GAAP, IFRS, U.K., GAAP and multiple local GAAPs.

Across these four process areas, HCL undertook a multi-year contract, undertaking to take out 35% of cost, while simplifying the IT environment with no up-front IT investment required by the client organization. In addition, the client organization was looking to establish a private utility or utilities across these functions that could then be taken to wider banking organizations.

In response, HCL established a private utility for the client organization across all four of these process areas and identified external reporting as the area which could be most readily replicated and taken to market. In addition, the process knowledge but not the technology aspects of the “cost utility” processes could be replicated, whereas management reporting is typically very specific to each bank and can’t be readily replicated. Accordingly, while private utilities have been established for the initial banking client organization across all four target process areas, only external reporting is being commercialized to other organizations at this stage.

Process improvement and service delivery location shifts have been made across all four process areas. For example, prior to the contract with HCL, 60% of the reporting was done by the bank in Excel. HCL has standardized much of this reporting using various report writing tools. In addition, HCL has implemented workflow in support of the close process, enabling the life-cycle of the close process to be established as an online tool and increasing transparency on a global basis.

Within the external reporting function, the approach taken by HCL has been to use Axiom software to establish and pre-populate templates for daily, monthly, and quarterly external reporting, extracting the appropriate data from SAP and Oracle ERPs.

In terms of delivery, HCL is creating global hubs in India (~80% of activity) with regional centers in the U.S. in Cary and in Europe in Krakow.  HCL has also put in place training in support of local country regulations, for example the differences between U.S. GAAP and U.K. GAAP.

HCL is continuing to take EFaaS to market by targeting major banking and insurance firms, initially approaching existing accounts. In terms of geographies, HCL is selectively targeting major banks and insurers in U.S., U.K., and Continental Europe.

The banks and insurers are expected to retain their existing ERPs. However, HCL perceives that it can assist banks and insurers in adoption of best-in-class chart-of-accounts design and governance and best practices around data management and simplifying the various instances of ERPs.

In general, within its EFaaS offering, HCL is prepared to fund projects for banks and insurers that involve cost take-out and where HCL can take fees downstream based on criteria where HCL has control of the outcomes.

HCL perceives “speed of replication” to be a key differentiator of the EFaaS approach, and the EFaaS framework initially used has now been replicated for another banking institution in support of their finance operations and external reporting processes.

This service is a timely response to the needs of capital markets firms in particular, that have been seeking to take considerable costs out of their operations and to carve-out and commercialize non-core functions into separate third-party-owned utilities. It is likely that capital markets firms will carve-out a relatively large number of narrowly-focused utilities with some of these being successfully commercialized by third-parties. The retail banks are likely to follow this pattern subsequently, though probably to a lesser extent than capital markets firms.

In addition to Finance as an enterprise function, HCL’s EFaaS model will be subsequently developed to target other enterprise functions such as procurement, HR, risk & compliance, legal, and marketing functions.

Transfer agency services include:

• Recording changes in share ownership 
• Canceling and issuing share certificates to reflect changes in ownership
• Replacing lost or stolen certificates

This exit reflects a change that is just starting in the financial services marketplace. Banks are now evaluating their businesses and deciding which ones to double down on, and which ones to exit.The U.K. market is very competitive in capital markets BPO services. J.P. Morgan is exiting the U.K. market for transfer agency services, but for now will remain in other European markets.

Over time, the change will raise prices somewhat (but not often by as much as in this case). However, the primary change will be to cede large parts of the market to process specialists (such as the process based capital markets BPO vendors profiled by NelsonHall recently). We expect bank operations to shrink significantly over the next five years with corresponding growth in BPO.