Wealth Management


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Wealth Management

  1. 1. Oct. - Dec. 08 / Vol 04 / Issue 15 featuring research from Wealth Management Interview Banking in Europe: Sean Gilchrist, The Emerging Shape Director of Digital Banking Wealth Management: Special Focus on Germany Barclays Bank The Symphony
  2. 2. Minimize risk. In the flat world, the financial industry has business transformation. Global banks like stepped up its compliance regulations ABN AMRO, ANZ, DBS, Credit Suisse, dramatically. So have individual ICICI, State Bank of India and many others governments. The cost of failure is have leveraged the power of Finacle to win very high. in this globalized world. Leaders in the field today have realized To know how global banks have that its impossible to effectively tackle maximized their opportunity and minimized the task of managing risk and compliance their risks to win in this flat world, do visit us in the flat world without replacing inflexible at www.infosys.com/finacle and obsolete technology with future-ready new generation solutions. They understand that doing so enables them to maximize the opportunities of globalization while minimizing the associated risks. Finacle from Infosys helps you win in the flat world by maximizing unlimited opportunities for growth, while minimizing the risks that come with large scale
  3. 3. Oct. - Dec. 08 / Vol 04 / Issue 15 featuring research from Wealth Management Interview Banking in Europe: Sean Gilchrist, The Emerging Shape Director of Digital Banking Wealth Management: Special Focus on Germany Barclays Bank The Symphony Oct. - Dec. 08 / Vol 04/ Issue 15 4 Voice from the Desk 5 Feature Financial Insights Risk Roundtable: A Report 12 Cover Story Wealth Management: The Symphony 19 Kaleidoscope Banking in Europe: The Emerging Shape Special Focus on Germany 26 Inside Talk Interview - Sean Gilchrist Director of Digital Banking at Barclays Bank, UK 28 Tech Watch Enterprise Master Data Management 32 Hallmark 34 First Look Assessing the Performance of Banking M&As in Europe: A New Conceptual Approach A Book Review FinacleConnect is a quarterly journal on banking technology published by Infosys Technologies Limited. For more information contact: Sumit Virmani, Infosys Technologies Limited, # 44 Electronics City, Hosur Road, Bangalore 560100, India. Tel: +91-80-41057020 or write to us at: finaclemktg@infosys.com All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, recording, or otherwise, without the prior written permission of Infosys Technologies Limited. Design & layout by VisualNet, www.vn4design.com
  4. 4. Is the world moving towards a recession? This is the “Customers want security to be overt,” states Sean Gilchrist, question uppermost in everyone’s mind. Recent weeks have Director of Digital Banking at Barclays Bank in InsideTalk. seen the financial services industry rocked by a level of “Security”, he says, “is always a concern for customers turbulence unprecedented in recent history. Who could irrespective of the channel they are using to access their have imagined even a few months ago that industry accounts and is a priority for banks”. Gilchrist spoke to stalwarts such as the 168 year old Lehman Brothers FinacleConnect about the opportunities and challenges would file for bankruptcy or Wachovia would be of digital channels for banks and also discusses Barclays’ acquired? The rescue packages devised by central digital banking strategy. banks in Europe and the US might have averted a global The cover story in this issue focuses on wealth financial meltdown, but there are fears now that the malaise management, an industry evolving with the expansion is spreading across industry sectors and the world is moving of an affluent client pool and increased competition towards a recession. How can the banking industry cope with created through mergers, acquisitions and the introduction this period of uncertainty, turmoil and business slowdown? of non-traditional players. The article explores key The coming months will be a period of realignment for developments in the wealth management space the banking industry. Technology investments need to be as well as provides perspective on the technology aligned with business objectives as banks look to rationalise solutions available. Apart from technology, however, says their technology platforms. The need for scalable and the author, the success of a firm’s wealth management flexible solutions that enable efficiency and customer strategy depends on the quality of advisors, the business centricity has never been higher. Most importantly, the model, organizational structure, customer segmentation and spotlight will fall on ensuring effective risk management at diversity of offerings. banks. This issue of FinacleConnect carries a report on the At FinacleConnect, it is always our endeavor to provide risk management roundtable, conducted by analyst firm you with current and relevant information. I am sure Financial Insights, where participants included Heads of you will enjoy this issue of FinacleConnect. Compliance and Chief Risk Officers of banks from across the world. The report details the viewpoints and Till next time! experiences shared by participants, the strategic initiatives planned and already underway, to combat pressing credit and operational risk concerns, and the underlying regulatory and technology implications. Focusing on the importance of consolidation and rationalization, this Haragopal M issue’s Tech Watch will look at how banks can leverage Vice President and Business Head - Finacle enterprise master data management. Infosys Technologies Ltd. 04
  5. 5. Financial Insights Risk Roundtable: A Report This Financial Insights report elaborates on the key points discussed at the Financial Insights Risk Roundtable, in which Heads of Compliance and Chief Risk Officers of banks from across the world participated. The report examines the viewpoints and experiences shared by participants of the roundtable, strategic initiatives planned and already underway, to combat pressing credit and operational risk concerns, as well as underlying regulatory and technology implications. 05
  6. 6. The situation overview consideration, with banks having to weigh the greater upfront costs of deploying In an uncertain business environment, it is not hardware tokens against the smaller initial surprising that the spotlight has fallen on the outlay associated with SMS-based solutions. adoption of effective risk management practices. Although this cost advantage is likely to Where credit and operational risks have always even out after 3–5 years when transaction been traditional areas of focus, regulatory costs in SMS-based solutions are taken into and reputation risks have come to the fore as account, the greater upfront cost for tokens potentially more damaging to a financial institution. means less flexibility to change in future. High-profile failures of risk controls and the • A global bank shared its experience in increasing sophistication of fraudsters (both introducing DFA — initial pilot trials of outside and within the organization) waiting to various DFA solutions were rolled out to pounce on gaps in risk practices means the role customers in five countries, and the bank of a risk executive is more challenging than tracked customer perceptions and actual usage ever. The discussion covered key issues that of each solution. While SMS-based preoccupy risk executives: authentication was found to be the preferred Regulatory and 1. Identity theft and management solution due to its convenience, the bank did point out that reliance on telecommunication reputation risks have 2. Enterprise versus siloed view of financial crime risk providers for the SMS services often led to come to the fore as 3. Anti-Money Laundering (AML) significant failure rates in countries with a poor telecommunication infrastructure. potentially more 4. Internal fraud 5. Credit risk management • Banks experienced increasing Internet damaging to a banking volumes — following an initial dip 6. Selling-risk in the organization — after the introduction of DFA. The initial fall financial institution. was attributed to the public’s natural aversion In the following sections, we discuss some of the initiatives risk executives have taken to navigate to additional inconveniences, such as their organizations through troubled waters. reliance on carrying physical tokens or the hassle of replacing lost ones. However, Identity theft and management: Dual customers have clearly warmed to the enhanced Factor Authentication security this also brings. • The introduction of Dual Factor Authentication • It was also pointed out how financial (DFA) to combat identity theft prompted lively institutions in Europe have adopted a debate, with bankers sharing their views on combination of bank cards and standardized various DFA solutions and the impact of DFA tokens to lessen such inconveniences and on Internet banking volumes. to benefit from economies of scale. There, • The pros and cons of introducing SMS-based customers had to input bank pass details, but authentication versus security tokens were they were not restricted to only using their discussed, with a number of banks choosing own tokens. This, however, is not an immediate to roll out a combination of both solutions. option in Asia-Pacific, where standardizing Deployment costs were obviously a key across multiple countries and meeting 06
  7. 7. multiple regulatory requirements poses a occurrences of identity theft. It was cited that huge challenge. some banks are writing off loans resulting from identity theft as bad debt loans rather • Ultimately, banks agreed that regardless of than fraud, which undoubtedly has a negative the choice of DFA solution, regular customer impact on a customer’s credit ratings. data cleansing efforts were needed to ensure that a client’s address (for token deployment) Enterprise versus siloed view of financial and mobile phone number (for SMS-based crime risk solutions) are updated. • Another important issue on the agenda was Challenges in mitigating identity theft the organizational view of financial crime risks. Here, roundtable participants looked • One approach to mitigating identity theft is at how banks were typically set up in silos, to put oneself in the shoes of the would-be fraudster. The Internet channel arguably offers with each operating unit — retail, corporate, the path of least resistance to a fraudster, who investment, securities arm, and so on — will take into account the risk of being caught setting up its own security perimeter. With against the financial rewards of getting away. no uniformity or standardization to organizational security, and with numerous • Roundtable participants discussed how security applications running across multiple Technology (or the lack the increasing prevalence of web-based environments (such as Internet banking, transactional activities, easy access to intranets, and virtual private networks), the thereof) was not the sophisticated scamming toolkits, accountability security footprint inevitably grows too big and issues (exacerbated by increasing reliance on major cause of identity complex to manage. infrastructure providers for IT security), and theft. The people difficulties in enforcement across multiple • A practical solution would, therefore, be to jurisdictions (for cross-border fraud cases) adopt a holistic, enterprise approach towards factor plays a huge part. offer numerous avenues for fraud and risk management. One bank pointed out that identity theft and serve to create a perfect this could be achieved by having a common storm for risk officers. enterprise risk framework (with baseline principles, standards, and policies), with • Banks were largely in agreement that risk officers empowered to enforce this across technology (or the lack thereof) was not the the organization. major cause of identity theft. The people factor plays a huge part. For instance, it was • At the same time, executives at the roundtable pointed out that in Singapore, people often recognized the complications of adopting disclosed their personal particulars online, an enterprise approach to financial crime through phone or paper-based lucky draws, risk. Communication issues, especially for presenting myriad opportunities for identity cross-border operations, will have to be theft. The onus is, thus, on the bank to addressed. The impracticality of imposing continue to educate consumers on the risks of stiff, centralized risk policies across functional such lax practices. and geographic silos — each operating in • Risk executives also agreed there remains different cultural and regulatory environments much scope for improvement in dealing with — also has to be considered. 07
  8. 8. • A CRO who has seen some success in this of business, products, services, and jurisdictions area advocated a groupwide approach to resonated well with the risk officers, who formulating internal risk policies based also recognized the importance of performing on regulations issued by a lead regulator due diligence and establishing strong (usually the regulator of the organization’s parameters beforehand. home market) and tweaking these for • The roundtable discussions also revealed that various regions without implementing spending on AML systems and processes wholesale process changes. were set to continue at a brisk pace, Anti-Money Laundering with investments centering on transaction monitoring technologies and account opening • The regulatory spotlight on Anti-Money procedures. Risk officers also looked at how Laundering (AML) was another issue that predictive analytics systems could be used in resonated at the roundtable discussions, as Know-Your-Customer (KYC), an important executives at the roundtable examined how step in AML efforts. An example was cited regulators have significantly cranked up in which behavior patterns of retail banking the legislative pressure around AML over customers in India were monitored, and the last few years. Already inundated by deviations from normal patterns of when an unprecedented number of onerous and and where they did wire transfers or made Regulators have often conflicting regulations, risk officers deposits could signal suspicious transactions. questioned if AML compliance legislations Examples of banks bringing their AML significantly cranked were necessarily well thought through. An functions in-house were also mentioned executive brought up the example of how as the participants concurred on its up the legislative her organization’s regional operating units growing importance. pressure around AML. face different turnaround times for reporting suspicious transactions — 30 days in the Internal fraud United States, 15 days in Singapore, and just • Recent high-profile instances of fraud 2 days in Macau. The short window for perpetuated from within underscored the compliance in Macau inevitably results in importance that risk executives place on a bombardment of reports sent to the mitigating internal fraud. Although the risk compliance department, as any and all executives broadly defined internal fraud suspicious transactions are flagged — or as the manipulation of limits and systems “Garbage-In Garbage-Out”, as another by employees, a distinction was made executive aptly put it. between small fraud issues (defined as policy violations) and larger ones (defined as • With banks increasingly subjected to global as procedural and operational violations), with well as local AML regulations, risk executives suggestions that enhanced efforts to catch are grappling with the challenge of balancing policy violations will act as a deterrent to priorities based on assessing different larger-scale fraud as employees recognize regulatory concerns (for example, tax that they are being watched. evasion and money laundering are key regulatory issues in the United States). A well- • Financial institutions have been quick to integrated AML framework that crosses lines recognize that effective data protection can 08
  9. 9. reduce the risks of internal fraud, as reflected staff, and to protect the anonymity of by the appointment of chief data officers in whistle-blowers. a growing number of financial institutions. • The recent Société Générale rogue trader Some banks have initiated moves towards incident has also highlighted the importance a thin-client, diskless environment to fight of monitoring employee mobility within the hemorrhaging of data and information. the workplace and between functions. Similarly, some banks have taken measures to Suggestions made included enforcing access progressively lock down their infrastructure, reporting and active disablement of accounts, disabling downloading functionality and as well as greater engagement between HR restricting usage of disposable disk drives. and line managers, who would have visibility This can go to the extent of requiring on employee transfers. administrative rights (held only by IT support) to make even simple changes. One risk Credit risk management executive suggested the need for an • Discussions about effective credit risk information leakage plan to provide self- management focused on efforts to reduce the assessment of business functions and to track risk of Non-Performing Loan (NPL) write-offs. how information is being discarded. Banks, Banks have seen some success in enhancing however, do acknowledge that such measures the transparency and accountability of loan Organizations will place a considerable drain on efficiency. approval processes. They have instituted • As was the case in the discussions around practices such as credit risk modeling, requiring lose up to 5% of external fraud and identity theft, banks multi-party approval for loan applications, their annual turnover recognized that whilst system control and treatment of loan extensions as new measures may be in place, they could not loans (i.e., subject to all the necessary checks). through people fraud. afford to ignore the people factor. The One executive suggested focusing on the Institute of Operational Risk, a professional gatekeeper functions of client-facing staff. body maintaining standards of professional At the same time, this has to be balanced competency in the discipline of operational risk with the promise of speedy, hassle-free loan approvals in the competitive consumer and management, projects that organizations will Small and Medium-size Enterprise (SME) lose up to 5% of their annual turnover through banking space. people fraud, with four in five instances of fraud perpetrated by internal staff. It was • The risk executives looked at how external further estimated that given the right factors sometimes played a part in credit opportunity, almost 25% of employees are approval. Examples were cited of loans to susceptible to committing fraudulent activities. high-profile individuals (such as government Here, there is no substitute to exercising officials and royalty) being exempted from vigilance in monitoring, accountability, and usual loan approval processes. The risk transparency. Risk executives at the roundtable officers also reflected on differences in credit recognized how important it was to foster assessment practices. For example, in India an organizational culture of risk awareness, consumer finance officers physically visit the to dissuade lax practices such as sharing of homes of subprime loan applicants as a credit profiles and access codes with temporary risk indicator. 09
  10. 10. Selling risk in the organization Singapore Banking Roundtable, key executives (who were not focused primarily on risk) • Executives at the Risk Roundtable discussed identified security and fraud management the challenges involved in fostering a culture as one of their most pressing issues in the of risk awareness and getting management current business environment. buy-in to increase risk budgets. Having effectively centralized their risk management Essential guidance for financial functions, two foreign banks revealed that institutions a critical success factor was successfully • It is encouraging to note that, for the most positioning risk as a business driver. One part, financial institutions across regions risk officer argued that for a financial have taken a proactive stance towards risk institution to effectively adopt a risk culture, assessment as they continue to plug the supervisors will have to take responsibility perceived gaps in their risk controls. There and be accountable. is ample evidence that regulatory and • Media hype around widely publicized fraud compliance issues have become top-of-mind cases has highlighted failures in risk controls for management. Risk officers, who are By looking at the and certainly helped drive risk awareness, becoming increasingly empowered as a result, as banks count the costs of the damage to would do well to continue driving deeper composition of the engagements across various business units, their reputations. However, securing true board of directors, which should in turn manage and maintain the management buy-in involves a lengthy risk they assume. education process, from the board, to country risk officers can get a managers, to the business units, and to IT • Financial institutions looking to implement sense of the level of personnel. Indeed, it was suggested that an effective enterprise risk management by looking at the composition of the board system should first ensure that basic elements awareness of of directors (where not everyone may be a — internal control policies, methodologies, banker), risk officers can get a sense of the and infrastructure — are in place. This risk issues. level of awareness of risk issues. Other will determine ability to integrate all risk hurdles cited included shareholder components down to the transactional level. requirements taking precedence over risk In addition, vulnerability to specific risks issues, limited view of risk management should be weighed alongside the probability of beyond meeting basic regulatory requirements, their occurrence. Responses would vary from and lack of innovative solutions to compliance merely tracking a risk and keeping it on the and risk management. radar screen, to identifying mission-critical risks that would have the greatest adverse • Encouragingly, there are signs that risk impact on the organization. management is indeed rapidly gaining mindshare in financial institutions. The CRO • Many banks do not have extensive historical of a global bank claimed that he is beginning data and suffer from disparate systems, to see questions on risk topics come from manual processes, and missing or incomplete management rather than the other way around. customer data. Unfortunately, risk analysis Lending further weight to this comment is depends on a solid data foundation, and the fact that at the recent Financial Insights institutions need to enhance the capture of 10
  11. 11. robust data, reinforce data ownership rules, • Scope remains for financial institutions, and establish ongoing processes to track especially some of the smaller local players, data quality. Financial institutions can look to bolster efforts in training their staff on to supplement internal data with external proper customer due diligence and data sources, either by establishing country data protection. Similarly, professional training bureaus so that a critical mass of quality data can be packaged as part of the customer can be developed and shared by industry outreach effort by well-trained, customer- participants, or simply by purchasing facing professionals to build greater customer vendor-based models. awareness on identifying and guarding against occurrences such as identity theft  • Financial institutions are advised to utilize in-house development for proprietary risk models that would give a competitive edge, Shawn Yip while purchasing vendor-based applications Market Research Analyst, for readily available and well-established Financial Insights Asia/Pacific solutions. When purchasing such off-the- shelf solutions, IT teams should verify that short-listed candidates offer risk products Abhishek Kumar that effectively cover organization’s existing Senior Research Analyst, portfolio, accommodate future updates, and are Financial Insights Asia/Pacific Banking, basically in synch with the business vision. Capital Markets and IT Benchmarking Services 11
  12. 12. Wealth Management: The Symphony Lovers of classical music will agree that Symphony Number 9 in D Minor is the last complete symphony composed by Ludwig Van Beethoven and one of his masterpieces. The woodwinds, brass, strings and percussion blend in a fluid composition to create that perfect symphony. In the same vein, tune in to the wealth management symphony and listen up. It does not take long to figure out that the notes do not sound quite right - there seems to be a discordant note that’s hard to miss. Market dynamics, ever-evolving client requirements, changing revenue models and a complex IT landscape have ensured that this dissonance continues to jar. Wealth management providers are struggling to piece together a fluid and flexible business model that combines service offerings and products with customer-centricity and IT platforms. The ‘flexible business model’ is today acknowledged as key to the smooth flow of melody. A truly flexible backbone in terms of the IT infrastructure is critical to help achieve this. As a wealth manager would put it ‘while we need not recreate Symphony Number 9, a symphony it must be nevertheless, and flexible too.’ 12
  13. 13. The wealth landscape experts to manage accounts and plan financial goals The wealth management marketplace is • Investment tools for customers and their evolving with the expansion of an affluent client financial planners to manage wealth: pool and increased competition created through Analyze portfolio, rebalance portfolio against mergers, acquisitions and the introduction of model portfolio, portfolio simulation and non-traditional players. Wealth managers are ‘what-if’ tools setting business goals that require innovative • Product types: Traditional banking, traditional technology solutions to help increase sales, investment products and alternate investments reduce costs, retain existing clients and attract new ones. They are increasingly coordinating • Straight Through Processing: End-to-end processes around their customers. They have long transaction processing for investments since realized the need to carefully evaluate and • Tax planning: Country-specific tax and quickly deploy the right technology solutions to social security garner competitive advantage in the market. The • One-stop financial shop: Interface with market considerations to create or strengthen a customer- data vendors, banks, depositories, clearing centric model are complex, but most firms have houses, custodians and brokerage houses recognized that long-term success is determined • Concierge services: Lifestyle related Banks establish by an organization’s ability to deliver customer- value-added services multiple touch points centric products and services. • Customized views and reports: Portfolio- Wealthy individuals have multiple and complex specific or across portfolios with clients and financial needs. Banks geared to meet their • Consolidated view: Complete financial picture typically benefit from needs build long-term relationships in which in one screen advice, as opposed to products and transactions, • Strict adherence: Financial regulation, enduring client loyalty. is the focus. These banks establish multiple touch compliance and other country-specific mandates points with clients and typically benefit from • Secure and trusted environment: Data storage enduring client loyalty and their predisposition towards referrals to prospective clients. The Increasing focus on advisory services primary differentiators are advisory capabilities, Private banking and wealth management product breadth, and facilitation of customer customers are turning cautious with their ease and convenience. investments as they seek better service Expanding the wealth management providers. The quality of service, reporting canvas and investment advice remain some of the important selection criteria for customers. ‘Know- The spectrum of offerings is spreading and the all’ advisors, offering advice across different scope of services is widening significantly. A product types, suggesting unique product quick glimpse reveals: bundling, predicting trends in the local and • Delivery channels: Anywhere and anytime as well as global markets and suggesting through branch / call center / online / POS / PDA investment protection mechanism, are key to • Personalized services: Advisory services, the success of wealth management services, relationship managers and financial planning today. With the frequent highs and lows in the 13
  14. 14. markets, there is an apparent disconnect between has resulted in direct competition in a space advisors and customers. Advisors are turning dominated, till recently by private banks and towards fact-based analysis and detailed case trusts. As a result, each of these players is looking studies to bridge the gap. at how best to differentiate its offerings. However, it would be pertinent to note that Clearly, then, as wealth management firms there is also a growing trend towards ‘Do-It- increasingly compete for the same high net worth Yourself’ (DIY) services, where knowledgeable clients, and clients themselves become more customers are not fully dependent on the demanding, the pressure is on firms to understand advisory services provided by the bank. To the essence of client needs in existing and provide such high levels of service, banks are growth markets, even if they have already seeking assistance from systems that offer a developed an accurate understanding of high holistic view of customer relationship across net worth individuals in their established markets. assets and liabilities, to tailor appropriate Without this insight, firms will find it difficult to investment solutions. develop an attractive proposition. As a result, banks are moving away from the conventional pure Share of the pie product focus and focusing on total solutions that Customers are also Wealth management clients are demanding are completely oriented to client needs. comprehensive and tailored services, with keen to maintain bespoke investment options. They are also keen Asset allocations, product offerings and to maintain relationships with multiple banks, innovations relationships with to compare offerings and opt for the best. The diverging investment environment in the multiple banks, Banks are sparing no efforts to strategically two halves of 2007 helped define high net to compare offerings transform their product offerings and services, worth asset allocation strategies. Based on while revamping their technology infrastructure steady market returns from 2006, asset allocations and opt for the best. to differentiate themselves from competition. of high net worth individuals were biased The wealth management space is now being heavily on riskier asset classes. However, towards catered to by different types of firms including the end of 2007 and into the middle of 2008, brokers, private banks, retail banks and insurance the turmoil in the financial markets has forced houses, and all of them are vying for the same investors to shift towards safer, less volatile clients - the booming mass affluent segment asset classes like cash deposits and fixed income. and the high net worth segment. Wealth Key trends in high net worth asset allocation management firms are making strategic strategies include: investments to differentiate themselves in the eyes of existing and would-be high net worth • Cash deposits and fixed-income securities and ultra-high net worth clients. seeing a jump in asset allocations and Insurance firms, brokerage service firms and currently accounting for 25% of the portfolio retail banks are investing heavily on the advisor centric model and each one is trying to be the chosen • Equity holdings remaining more or less wealth manager for the retirement segment as constant but seeing an increasing trend well as for the younger generations. This towards private equity over public equity 14
  15. 15. • Percentage of allocation to alternate investments showcase examples of successful high margin and real estate going down significantly and high growth players. Rapid changes in asset allocation strategies Specialized wealth management firms catering based on a dynamic market place have resulted to the high net worth segment have known for in banks reviewing their product offerings years that in this space one model does and offering innovations on current products, not fit all. Retail banks pushing into the while trying to move client holdings to ‘wealthy segment’ – a mix of the mass affluent and safer investments. high net worth, have realized that it is almost mandatory to design a service model flexible Banks have realized that product range and enough in architecture to accommodate diverse features are key differentiators in today’s fiercely customer- and advisor-centric models. It implies, in competitive and largely unpredictable market. a larger sense that banks have to invest heavily in The manufacture of products is not every bank’s the underlying technology. cup of tea and the ‘gap’ in product offering is catered to by distributing products originating At a very high level the models currently from other issuers. While manufacturing products deployed are: is definitely the way forward, distribution income • Transactions continues to be a key revenue stream. Product range • Investment management and The investment domain spans across a wide and features are • Wealth planning range of products and there is a definite shift Based on the conditions and the market key differentiators from traditional investments in funds, equities and fixed income to alternate investments like environment a bank can choose to mix and in today’s fiercely structured products, real estate, private equity match these models. and hedge funds. competitive and largely • The transactions model includes pure play Banks have also realized the benefits of innovation brokers who facilitate investments in basic unpredictable market. in terms of product bundling and utilization asset classes, and product experts driving of customers’ ‘sleeping assets’. Loan products transactions through sophisticated products bundled with insurance, margin lending, self • The investment management model includes funding instalments to gain geared share exposure, advisors and relationship managers who and bundling of banking and investment products plan, determine and advise customers in the are some interesting products on showcase. pre- and post-investment phase Strategic business model • The wealth planning model offers holistic On one hand, there are a small number of large advice in accordance with client’s finances global banks that have implemented integrated and goals. These could encompass arenas business models spanning across typical banking and such as real estate, retirement and investment products and services. On the other generational wealth transfer hand, there exist specialized wealth management boutique firms providing sophisticated products, The chosen model has a direct impact on the specialized services and niche area services revenue model for a bank in terms of fees for specific customer segments. Both extremes and commissions. The transaction model is 15
  16. 16. typically fee-based and moves towards The technology perspective commission-based revenue for wealth planning. In general, wealth management providers have Revenue drivers identified three major technology domains for a full-fledged service provider: the front-office, Retail banks are establishing themselves in the middle-office and the back-office. a space traditionally dominated by private Wealth management platforms are integrating banks and niche service providers, in order to front-office with the middle- and back-office handle the booming mass affluent segment and components to leverage an end-to-end solution. the lower end of the high net worth segment. Platforms provide the technical infrastructure The typical model on view is the distribution for wealth management services. Designed model with end-to-end services across the with open architecture, these platforms offer banking and investment domains. Banks have the ability to integrate with third party identified key revenue drivers as: solutions, adding a broad range of features Product manufacturing • Revenue from distribution (third party products) and functionalities. and revenue based on • Commission on transaction-based revenue • Service-oriented Architecture (SOA) (from execution broker) assets under The wealth management process is dynamic • Revenue from advisory services and factors in change at a rapid pace, primarily management and ROI to incorporate new products, new processes, • Cross-sell opportunities to existing customers would be the way regulatory requirements and address ever- Product manufacturing and revenue based on changing customer demands. Service forward for banks. assets under management and ROI (Discretionary providers must respond quickly to business PMS) would be the way forward for banks. changes and leverage existing investments Fig 1: Key components of wealth management Discretionary Normal Investment Accounts Non-discretionary Pension / Retirement Accounts Customer Advisory Super Annuation Accounts RM / Advisor Delivery Channels Transaction-based RM Desktop Fees Wrap Fees Planning Tools Portfolio Management Order / Transaction Portfolio Reporting Management Advisory Fees and Analysis Financial Planning Relationship-based Charges Data Aggregation Layer In-house Products Banking Products Loans | Deposits | Cash Accounts External Distribution Products External Entities Bundled Products Investment Products Equity | Fixed Income | Investment Funds Market Data Vendors Gearing Products Private Equity | Structured Products | Alternate Investments Hedge Funds | Real Estate Products Online Trading Systems Insurance Products Life Insurance | Non-life Insurance Regulatory Reporting 16
  17. 17. in applications and the application offers an integrated platform for traditional infrastructure to address new business banking and wealth management products requirements, while supporting new channels and processes. Retail banks entrenched, of interactions with customers, partners and expanding or venturing into the wealth market data vendors. management space are increasingly seeking integrated platforms to service customers. Wealth management providers and private banks must focus on open standards for The typical ‘one system’ provides the communication with external entities. necessary infrastructure to support various Service-oriented Architecture and web service asset classes and provide banks with a standards will be the key components of consolidated view of customers’ portfolio current and future wealth management across banking and investment products. With systems as it will help technology vendors a topping of SOA, web service standards deliver flexible and cost effective solutions. and robust work flow engine, it would Wealth management is a complex process and provide the ideal ‘one system’ solution for to support this the system needs to embed, banks to service their customers. However, incorporate and interface with multiple going by the business domain it caters to, systems for customer information, market wealth management systems inevitably need data, transaction data and accounting. to interface with niche area systems and external entities. Account aggregation, one of the critical components in the wealth management The shortcomings of the ‘one system’ process will be served well by the ‘SOA approach are in terms of depth of trend’ as it will enable service providers to functionality and infrastructure changes that share, integrate and mine data across multiple have to be optimally countered across the systems and entities. system. This could entail higher costs and migration related issues. • One system or multiple systems? • ASP model The ideal wealth management system should provide a complete ‘front-to-back’ A wealth management platform in the functionality for all asset classes, product ASP model is another emerging trend. The types and related processes. It must facilitate platform provides for an integrated front-to- Straight Through Processing (STP) for all back office system serving the entire gamut transactions, account aggregation and, of client management and advisory services, portfolio planning, monitoring and reporting. transaction processing and reporting. Wealth management essentially runs across The application is hosted by a service various product types in the investment and provider. Banks, brokers and investment banking domains. There are ‘one system’ houses which offer wealth management vendors and ‘niche area’ vendors currently solutions can opt for this standard application servicing the ever increasing technology by paying charges either annually or based requirements in this domain. on transactions or assets under management. In recent times, there has been a growing trend The model may seem attractive to relatively of adoption of the ‘one system’ approach which smaller players in this space who would want to 17
  18. 18. effectively eliminate technology infrastructure Ultimately, the greatest success will be realized maintenance but it has not attracted much by those banks that comprehensively understand success due to the ‘same infrastructure for all their clients. They will be able to leverage providers’ model. existing strengths to transform and adapt their service delivery and technology to cater It is critical that banks evolve their effectively to client needs in their target IT infrastructure in line with their service growth markets. delivery model. Without doubt, technology is an important The future lies in the current trends enabler in delivering efficient actionable advice, • Mass affluent and high net worth client but it is only a supporting tool in the client-to- segments will continue to grow their wealth advisor relationship, which plays a key role The greatest success in managing the institution’s customers. but at the same time look at more risk- will be realized by mitigated strategies Other factors contributing to the success of • Acquiring and retaining clients and their a wealth management strategy include the those banks that assets with robust client servicing are the quality of advisors, the business model, comprehensively key challenges for service providers organizational structure, customer segmentation and diversity of offerings  understand their clients. • Service providers have determined the ‘criteria’ for success but believe that adequate References technology tools are still not available 1. Capgemini wealth reports • Service providers are convinced that they 2. Wealth management systems survey need flexible service delivery models 3. PWC reports on wealth management • IT strategy should evolve around the service delivery models Abhra Roy • Service providers are taking a holistic view Principal Consultant of their technology infrastructure moving Finacle Wealth Management away from the product silo approach Infosys Technologies Ltd. 18
  19. 19. Banking in Europe: The Emerging Shape Special Focus on Germany The financial crisis contagion has spread eastwards from the US and the European banking industry has been through a roller-coaster ride. While government bail-out plans have been effective to an extent, the European banking industry is bound to experience a slowdown in the coming months. This article explores the key trends in the European banking industry with a special focus on the banking industry in Germany. 19
  20. 20. The financial crisis that originated in the US guarantees and up to €15 billion ($20 billion) subprime market in August 2007, has left in equity to support the country’s banking sector. the entire financial world gasping for breath. The government had already announced a While initially several industry analysts had guarantee for all personal bank savings, applicable suggested that Europe would remain untouched from 1 October 2008. by the credit crisis, this has not been the case. An economic recession is very much on the cards Europe has experienced a spate of bank failures, and these events will no doubt have both a short the first of which was Northern Rock in the and a long term impact on the European banking UK. Some of the other casualties have been sector. However, it must not be forgotten that Iceland’s Glitnir bank, Germany’s Hypo Real since the 1990s, the banking industry in Europe Estate Holding and UK’s HBOS. Belgium’s largest has experienced a period of rising profitability banking group, Fortis, needed the intervention despite not-very-strong economic growth in many of the Belgian and Dutch governments and the instances. It is believed that the fundamental sale of some of its assets to French giant BNP developments of the past few decades will Paribas, to stay alive after getting into difficulty continue to shape the banking industry in the post purchase of Dutch bank ABN Amro. It is coming years. The creation of a estimated that with this deal, BNP Paribas has Developments that shaped the single economic and become the largest bank in Europe. European banking industry Analyst firm Datamonitor says in its report, According to data from The Banker’s Top 1000 monetary market in ‘European Retail Banking Technology Business World Banks in 2008, Italy has the most profitable Europe has long Update H1 2008’, that till June 2008, European and Germany the weakest banking sector among banks had performed write-downs totalling the big five European economies (France, been the objective of €90.5 billion ($121.4 billion). Germany, Italy, Spain and Britain). Spanish banks have been the most successful in expanding their policy makers. While the credit crunch virtually brought the presence internationally, while Italian banks such economy of Iceland to its knees, governments in as UniCredit and France’s Société Générale have the UK and several other countries in Europe been strategically increasing their presence within including France, Germany, Spain and Italy, Europe itself. have announced bailout packages that involves Some of the main factors shaping the European part nationalization of the their banking sector. banking industry are listed below. The British government has decided to inject €47.6 billion of public money into three banks • Integration HBOS, Lloyds TSB and Royal Bank of Scotland. The creation of a single economic and France has announced a €320 billion rescue plan monetary market in Europe has long been the while the German government’s rescue package objective of policy makers. There has been includes €80 billion in fresh capital and €400 considerable progress in this arena, starting billion in loan guarantees. from the creation of the European Union (EU) and the Euro. The EU comprises 27 member Austria’s Chancellor Alfred Gusenbauer recently states, 15 of which comprise the Eurozone said that his government would provide up to where the Euro is the sole currency. With €85 billion ($114 billion) in inter-bank loan almost 500 million citizens, the EU generates 20
  21. 21. Top 25 banks in Western Europe ($ million): services with implementation of the Markets Source: The Banker July 2008 in Financial Instruments Directive (MiFID) Regional World Bank Country Tier 1 from November 2007. The retail banking ranking ranking capital segment however remains fragmented along 1 1 HSBC Holdings UK 104,967 national borders. 2 3 Royal Bank of Scotlan UK 88,888 3 7 Credit Agricole Group France 68,724 Notably, regulatory control for a country’s 4 9 Santander Central banking industry resides with its regulators. Hispano Spain 58,479 5 11 BNP Paribas France 55,353 This makes coordinated action difficult, as 6 12 Barclays Bank UK 54,915 was evidenced in the recent discussions 7 14 HBOS UK 48,864 regarding bailing out the industry from the 8 16 UniCredit Italy 47,854 9 17 ING Bank Netherlands 43,827 financial crisis. 10 20 Rabobank Group Netherlands 41,931 • Consolidation 11 21 Deutsche Bank Germany 41,690 12 22 Fortis Bank Belgium 37,789 Estimates by the European Central bank 13 24 Credit Mutuel France 35,944 suggest that the number of credit institutions 14 25 Intesa Sao Paolo Italy 35,754 15 26 Groupe Caisse in the EU-15 decreased by 28% from 9,624 d’Epargne France 32,121 in 1997 to 6,926 in 2006. Consolidation has 16 27 Societe Generale France 31,821 been the hallmark of the European banking 17 29 Credit Suisse Group Switzerland 30,864 18 30 Banco Bilbao industry driven primarily by a search for a Vizcaya Argentaria Spain 30,412 newer customer base and, higher efficiencies 19 31 UBS Switzerland 29,152 20 32 Lloyds TSB group UK 27,954 and scale. Examples of cross-border European 21 35 Caja de Ahorros y deals are HSBC’s acquisition of Credit Pen.de Barcelona Spain 24,552 Commercial de France, Barclays’ acquisition 22 36 Commerzbank Germany 24,044 23 37 Groupe Banques of Banco Zaragozano, Unicredit’s acquisition Populaires France 22,257 of HVB and Santander’s acquisition of 24 40 Dexia Belgium 21,418 Abbey National. 25 42 Nordea Group Sweden 20,948 Note: Some of the rankings might have changed because of recent market According to analysis by changes, for example HBOS’ acquisition by Lloyds TSB would move PricewaterhouseCoopers, one-third of the Lloyds among the top five banks in the region. number of bank Merger & Acquisition deals in Europe over the last 10 years have an estimated 30% share of the world’s involved banks in Western Europe acquiring nominal GDP. Apart from this, much has all or part of banks in ‘emerging’ Europe, been achieved in the creation of a single Central and Eastern Europe (CEE), the market for the financial services industry. Commonwealth of Independent States (CIS), Work is ongoing towards the SEPA (Single the Baltic States and Turkey. This was enabled Euro Payments Area) initiative that is set by the privatization programs in these emerging to make EU-wide payment transactions as countries that allowed Western European banks convenient and efficient as those at a national to enter the markets through the acquisition of level. Major steps have been taken towards state owned banks. the implementation of the Financial Services Merger activity is expected to continue as Action Plan (FSAP), especially in creating banks further consolidate their positions and a single market in wholesale financial weaker banks succumb. Recently the credit 21
  22. 22. turmoil saw the unexpected acquisition of of broadband facilities has made Internet HBOS by Lloyds TSB. Hectic M&A was also banking taken-up increasingly over the past few witnessed in the German banking industry. years, while analysts predict that mobile banking, too, will take off in the near future. • Internationalization Increased focus on risk management and Internationalization is a prominent feature compliance requirements have seen high of the European banking industry as banks levels of technology investments in these look for growth and opportunities to diversify. areas as well. Apart from global players such as Citigroup Going ahead, in the aftermath of the credit which has a significant presence throughout crisis, analysts suggest that IT investments Europe, ICICI Bank (India) and numerous though slightly reduced, will still be a key Chinese and Islamic banks have been targeting area of focus. Investments might be re- Europe. European banks themselves have prioritized, although it is expected that been going outwards to emerging markets areas such as risk management and core of India, China, Africa and Latin America banking replacement will continue to be a either through acquisitions or by setting up key focus area. direct operations Santander for instance, has been very active in acquiring banks in Latin German banking industry : An Stymied by their legacy America. The highly attractive US banking overview market has been a target of acquisitions as systems so far, even Europe’s largest economy and the second-most well. Firms such as Deutsche Bank, HSBC, populous nation, Germany was once celebrated the tier 1 banks have BNP Paribas and HSBC have made strategic as Europe’s economic powerhouse. But falling acquisitions in the US over the past decade. exports combined with high costs due to an started considering • Technological progress inflexible labour and services market and the third party solutions. Technology is one of the key factors modernization and integration of East Germany have contributed to muted economic growth. influencing the banking sector in Europe. Amidst growing fears of a recession, the German Most banks in the regions, especially Western government recently slashed its growth forecast Europe, have invested in automating their for 2009 from 1.2% to 0.2%. In the face of the banking operations. Much of it was proprietary ongoing financial crisis the German Parliament has in nature. However, the availability of new, approved a €500 billion ($675 billion) financial sophisticated technology solutions led to rescue package. Earlier, on 6 October 2008, the small and mid-tier banks adopting off-the-shelf government stepped in to avoid the collapse of solutions. Stymied by their legacy systems Germany’s second-biggest commercial property so far, even the tier 1 banks have started lender, Hypo Real Estate. In an attempt to prevent considering third party solutions. Analysis a subsequent run on banks, the government by Deutsche Bank Research suggest that announced it would guarantee all personal bank European banks’ IT spending increased from deposits in the country. around 10% of total expenses at the beginning of the 1990s to 30% by 2005. Remote The German banking industry is dominated by delivery channels are widely deployed by universal banks that combine the functions of most banks in Europe especially those in the commercial and investment banks, including the Scandinavian countries. The high availability securities business. The Association of German 22