10:31 am - Wednesday March 21, 2018

Financial Market Harmonization Through Financial Technology Application

The global financial industry is in the midst of unprecedented and challenging times. Changes in market conditions drive a very different economic climate which beckons the need to accelerate market harmonization in emerging countries.

What are the lessons learned from cross border around the globe? How can emerging markets piggy back on the global trends for harmonization? What role should central banks and other global market leaders play in driving harmonization? Where should it start: infrastructure, currency, regulation?

In my view, infrastructure should be the starting point for harmonizing financial markets. With in infrastructure, technology particularly financial technology should be starting point for harmonization.

I would like to deal with this subject in four parts as under

Part A – Financial Markets and Financial Institutions
Part B – Financial Technology
Part C – Financial Technology Vendor Selection
Part D – Business Benefits

Part A – Financial Markets and Financial Institutions

In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals) and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. (Wikipedia)

Primarily, functions of financial markets can be grouped under Borrowing and lending, Price determination, Information aggregation and coordination, Risk sharing and Liquidity and Efficiency.

Like any other business, financial institutions in the financial markets exist to acquire and use assets so that the value of their benefits exceeds their costs. The key difference between financial institutions and other firms is that most of the assets financial institutions hold are financial assets. The other main distinction between financial institutions and other firms is not so much in how they raise funds, because all businesses issue financial liabilities do so, but in what they do with these funds. This process of funds transformation is known as intermediation. For this reason, the financial institutions are also called as financial intermediaries.

The need for financial intermediaries in the financial markets arise in the first place due to the need for reduced transaction and information costs in the market and they are achieved through facilitating a reduction in Search costs, Portfolio selection costs, Monitoring costs, Risk management costs and Liquidity costs. And this intermediation is influenced by customer needs, ownership structure and regulation.

The financial institutions will need to Segment markets and build up in depth knowledge of customers, Develop wide range of demand driven products and services, Leverage on appropriate technologies and Develop multi channel network for delivery of their products and services.

Use of advanced, cost effective tools for comprehensive risk management, Aligning organization structure to target market segments, Developing efficient integrated MIS systems, Good governance, transparent reporting and Adherence to highest environmental and social standards are other subsequent activities the financial institutions will need to address.

Some of the major challenges faced Financial Institutions in their function are – Reduce cost of acquisition of new customers, Retain credit worthy customers, Maximize profit contribution per customer, Optimize fee income and interest income, Reduce cost of delivering the best people service and best Quality at low transaction cost (quality transaction at low cost)

The main risks (COOL TIMES) faced by financial institutions in the conduct of their business are:

C – Credit Risk and Country Risk
O – Operational Risk
O – Off balance sheet Risk
L – Liquidity Risk
T – Technology Risk
I – Interest Rate Risk
M – Market Risk
E – Exchange Risk
S – Sovereign Risk

Part B – Financial technology

In his Introduction to Financial Technology Roy S. Freedman states financial technology is concerned with building systems that model, value and process financial products such as bonds, stocks, contracts and money. Financial products are represented by the dimensions of price, time, and credit. Financial systems incorporate trading systems and trading technology to enable the buying and selling of products at different times and in different market spaces.

Financial technology integrates mathematical, statistical, computing and economic models with news and analytical systems: and integrates with message, transaction, and order processing and payment systems. Financial systems perform their activities in compliance with rules, procedures, guidelines and regulations. Like military systems, financial systems are involved with strategy and tactics, logistics, information processing, secrecy and resource allocation.

Thus, financial technology facilitates reduction in transaction costs and increase in the price sensitivity of financial markets across borders, while at the same time making possible a range of economies of scale. Financial technology addresses the issues adequately in extending the field of finance beyond major financial capitals to the rest of the world.

Financial technology brings the advantages enjoyed by the clients of “Wall Street” to the doorsteps of customers of “Wal-Mart”. Financial technology enables this through cost-effective ways to leverage and strategically replace outdated and incompatible legacy systems, ushering in best practices from around the world.

Some strategic and key questions one will need to address before investing in Financial Technology are:

Feasibility – Technical feasibility, Credibility of fundamental science and engineering, Technical fatal flaws and Delivery of product or service

Values – Current perceptions, Competing technologies, Future proposition and Risks and uncertainties

Strategy – Technology road map fitment, Base, key, or emerging and Time to invest

Implementation – Resources, Processes and organization and External barriers to transfer

Part C – Financial Technology vendor selection

Financial Technology vendor selection is critical and crucial for business success as there are many technology companies to choose from, just as in any other market. Some of the “not-to-overlook” aspects are:

Financial Technology vendor should be a quality technology vendor, certified by reputed organizations. The vendor should have time tested best quality practices and standards and cutting across the organization; everyone working in the organization should be familiar with these quality practices and standards.

Financial Technology vendor should be a well known name in the Banking, Financial Services and Insurance vertical with proven capability. It would be ideal if this vendor specializes only in the BFSI vertical so that his time and efforts are not diverted in to other un-connected verticals.

Financial Technology vendor should have strong domain knowledge, focusing on best market practices and constantly upgrading the skills of his employees in the chosen vertical. An ideal vendor should have done basic research in the BFSI vertical and created totally in-house resources for the domain practice.

Additional hygiene factor to look in for in this Financial Technology vendor selection is the number of specialists with banking, financial services and insurance background and who have proved themselves practically in these areas.

Financial Technology vendor should be able to offer both IP-led in house developed products and customized service offerings. Only then the vendor would be in a position to understand, appreciate and offer best solutions. He would be in a position to analyze the customer requirements and recommend the best fit either in the form of product or service and leave the decision making to the customer rather than thrusting the product or services on him. However, there are very few players in the market with both product and service to offer and.

Financial Technology vendor should have extensive tools and research to his credit. This vendor should be in possession of repository of accelerators and in-house assets and frame works to aid the financial market industry in the acceleration of development and testing lifecycles. He should be in a position to provide right technology tool.

Show me your list of customers and I will tell you the level of your Competence” applies very well to financial technology vendors too. Our ideal financial technology vendor should have diversified clients’ base and wider geographic coverage. The market leaders in the BFSI industry should be the existing customers of the proposed technology vendor. In addition, the length of their relationships and extent of offerings are also important in the selection process to look at.

Other critical aspects: One who can offer variety of business options, One who has perfect business technology fit and alignment, One who can provide faster time to market, One who can bring the best integration capability to the table, One who constantly innovates and invests in technology and One who can provide competitive and cost advantage

In other words, go for one who is not a scale player (in every vertical) but who is a skill player in BFSI vertical alone. This vendor will truly be a proven ‘financial technology’ vendor.

Why it is critical?

Only financial technology vendor can meet the entire needs of Banking, Financial Services and Insurance industry clients comprehensively as they can offer client centered services and products as they

– Focus on clients’ needs
– Present solutions to business problems proactively
– Look forward to long term relationships
– Provide partnership orientation
– Analyze payback, ROI, Impact on business meaningfully
– Integrate value added offerings into strategies

Other non-financial technology vendors can also claim to offer services and products to Banking, Financial Services and Insurance Industry. However they will

– Focus on their products and technologies only instead of clients’ needs
– Present information in reaction to a request
– Have short term focus
– Have vendor/buyer orientation
– Build on their profit margin only
– Have no controlling strategy to facilitate clients

Financial technology Vendors can answer effectively all the following questions

– What is the clients’ problem or need?
– Why is this problem a problem?
– What outcomes or results do they want?
– Which results have the highest priority?
– What solutions can one offer?
– What results will each solution produce?
– Which solution is best?

Only such financial technology vendors can offer value to the clients on all the fronts, namely

– Financial gain (lowest price, highest total value and lowest total cost of ownership)
– Quality (Total quality management, maintainability, ease of use, fewest problems , fewest rejects and fewest reworks)
– Infrastructure improvement (most flexible, most advanced, most open solution and automating a labor intensive step leading to straight through processing)
– Industry trends (keeping up with market leaders)
– Minimizing risk (financial stability, solid management plan, relevant experience and high ethical standards)
– Competitive advantage (simultaneous improvements across the organization)

Finally, only such financial technology vendors can persuade the clients by thinking their thoughts, feeling their feelings and speaking their words. They can only understand the language of the ‘heart’!

Part D – Business benefits

The business benefits that financial technology can bring in for financial institutions are grouped under technology perspective and management perspective.

Technology perspective

Quick time to market, Reuse of components, Building blocks approach, An easily integral solution, Service Oriented Architecture, Scalable and flexible platform, Capability to handle complex products, An adaptive seamless business workflow, Provision of user documents and training, Integration to get over duplication of work, Automation of number of complex processes, Strong authentication and authorization system, Implementation of standard operating procedure, Significant improvement due to real time process, Common tools and utilities to leverage technology, Functionally rich and technically superior offerings, Ability to process multiple transactions in lesser time, Alignment with market’s best practices and standards, Support offline transactions and Standardize service process with multiple check points

Management perspective

No other external vendor dependencies, Highly improved turnaround time, Achieve better service management, Ability to leverage on domain expertise, Effective business mapping at all levels, Year on year productivity improvement, Enhanced customer relationship management, Metrics to report productivity and performance, Robust transition to ensure non disruptive moves, Senior management connect, focus and commitment, In built global best practices for better quality management, Data integrity and automated processes to help prevent defects, Flexibility and ease to change business rules and scoring logic, Ability to aid in deciding the next stage in application processing, Ability to view risk to enable higher control and risk management, Plan transition to offshore, without impact to ongoing deliverables, Enable rapid launch of new products for new lines of business, Ability to keep pace with dynamic business needs and requirements, Business rule changes done by the business users themselves, Configuration only required for creation and maintenance of rules, Enable tracking of global transactions for effective risk management, A robust knowledge transition to ensure minimal disruption of service and Centralized decentralized decision making resulting in business growth

Metrics to measure these business benefits

Reduced or no additional head count, Low set up costs and time, Enhanced visibility in the market place, Lower response time to say YES to customer, Customer ready team with requisite experience, Significant operational efficiency improvement, Cost benefits through the on shore / offshore model, Maintenance, Management and inventory cost reduction, Significant cost saving with no impact on delivery capacity and Freeing up resources for development in business development.

One can now realize and recognize that financial technology will help financial institutions in reaping immense business benefits and thereby achieving leadership position in the market place.

The bottom line: Financial technology will give you what you need to succeed. Naturally it should be the choice of the market place to begin harmonization.

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