Japan Day kicked off with Mizuho Financial Group chief executive officer (CEO), Yasuhiro Sato, giving a keynote address that focused on the structural changes in the Japanese economy and the role of the country’s financial services industry in this changing environment.
Sato commenced with an overview of how three major shifts are affecting Japan. The first is slowing growth in Europe and North America and how Asia is shifting from being the world’s factory to becoming the world’s market. The middle to high income population in Asia is expected to double, he noted. China is a key part of this growth, and the renminbi (RMB) is now emerging as a settlement currency.
At the same time there is a second shift, the hollowing out of industry in Japan. The combination of a strong yen, environmental regulations, employee practices, taxes and tariff barriers inhibit the country’s economic growth. While the Asian share of profit by Japanese corporations has increased rapidly, Sato does not believe that overseas expansion will lead to domestic expansion or an increase in Japanese employment.
Thirdly, there is a low birthrate and an ageing society that is resulting in a decline in labor, which is what he regards as the biggest factor contributing to the decline in Japan’s growth.
Sato said he sees four generations of business models in the financial sector. In the first generation, through to the 1980s, commercial banking and investment banks were independent. The second, in the 1990s, was the era of financial conglomerates and megabanks. The third, in the 2000s, saw the growth of investment banks and proprietary trading as well as complex security products and financial engineering. The fourth generation, which started in 2010, is still searching for a new shape and a new post-Lehman financial business model has not yet been established.
He suggested that financial institutions should focus on five areas:
- Real customer demand.
- Sophisticated risk-taking and strengthened financial intermediation.
- Globalisation, where Japan’s financial institutions should, in particular, expand their world presence and play a key role in financial market development.
- Abundant liquidity and appropriate capital strength.
- Strong corporate governance supported by an equally robust corporate culture.
New Approaches to Doing Good
Innotribe co-founder, Matteo Rizzi, chaired over a lively morning Innotribe innovation session that looked at how start-ups in the industry are taking new approaches to “doing good” and creating a better world through financial services.
Citi managing director, Kartik Kaushik, opened the panel discussion by saying he’s looking at how to support social innovation through leveraging education, peoples’ interest in their heritage and enablement. One successful model of enablement he mentioned, albeit outside of banking, is the Mars confectionery company. Mars gives agricultural support and training to farmers, and it increased the farmers’ income as well as the quality of the chocolate in its products. As bankers who understand money as a tool, he said, participants should be looking at how to fund similar business models to mentor change.
Kaushik added that bankers still need to be conscious of their role as secure keepers of peoples’ money. “Would you want me to put your money at risk?” he asked. What banks need to do is make money work harder so it produces returns to shareholders, depositors and the business, albeit perhaps with somewhat different metrics when considering social inclusion.
Yunus Centre chairman and Nobel laureate, Professor Muhammad Yunus, then told his story of building a successful and very different model for banking. He related how he started small-scale lending to women in the 1970s, growing the practices of lending into Grameen Bank, with over eight million borrowers in Bangladesh, and the concept into microcredit. When he created Grameen, he said, he wanted to solve a problem and had no intention of making money for himself. Since then he has created 60 other social businesses that also solve social problems, from reducing malnutrition to producing clean water.
Charity is a wonderful idea, Yunus said, but it has limitations. Money goes out but it doesn’t come back, so you remain dependent, and organisations can spend 75% of their time in fund raising. A social business, on the other hand, is a more powerful practice since money goes out and comes back ad infinitum.
Yunus urged participants to look again at banking. Poverty is not created by poor people, he said, it’s created by the system and by institutions like banking. Most bankers lend money to people who have money, so they’re serving the top. When he started out he was told that he shouldn’t lend money to the poor as they were not creditworthy, yet it turned out that almost all Grameen’s borrowers, whether in Bangladesh or New York, pay back their loans. When other banks were contracting in 2008 Grameen was expanding, so “you tell me who is creditworthy,” he added. It was now time to re-think banking, as it could not continue in the same way as before.
Massachusetts Institute of Technology (MIT) ‘entrepreneur-in-residence’, Julius Akinyemi, then looked both at how technology can enable social entrepreneurship and how to measure performance. He said it’s important for social enterprises to place a value on their services rather than making them free, since in many places – including his home country of Nigeria – no-one respects anything that doesn’t have a value associated with it. One area that combines technology and creating value, Akinyemi said, is at the bottom of the pyramid. More than 67% of financial transactions are non-official. Bringing them into the financial system, collecting the data and registering those assets could give them value and have a large multiplier effect.
With that background from the panel, five Ashoka fellows then gave short presentations on the innovative financial social enterprises they have started up that are changing banking.
- Twin Cities Rise (TCRise), by founder Steve Rothschild: What Rothschild wants TCRise to do, he said, is to fund high-potential human services such as building roads, bridges or government buildings, while also helping to train workers, provide high quality services for the elderly and lower reoffending rates by prisoners. To do that, TCRise hires and trains workers who might otherwise receive social services. In its contract with Minnesota, the state pays based on the increases in taxes and the decreases in government spending, and he said Minnesota has enjoyed a 624% return on its investment.
What TCRise needs, said Rothschild, is a new source of investment to provide capital for the highest performing social enterprises to grow. The most efficient vehicle is a government bond. He called on participants to use their advisory services to help governments, talk to non-governmental organisations (NGOs), invest on behalf of their clients and increase their profits while doing social good.
- Agora, by managing partner Ben Powell: Powell explained in a recorded message that Agora is a non-profit business accelerator that helps companies in Latin America with under US$1m revenue that solve problems in their community and need capital to grow. One example is CO2 Bambu, which builds houses out of bamboo in post-disaster areas and other regions in Latin America.
Powell explained that accelerators help entrepreneurs to build networks of mentors, advisors, fellow entrepreneurs and angel investors. He sees a historic opportunity to collaborate to create a platform to give access to capital. Banks, impact businesses, accelerators and SWIFT can work together to drive cost down, lower risk, increase profitability, increase sustainable impact, and reduce delivery time.
- Wizzit, by managing director Brian Richardson: Wizzit is a mobile banking enterprise that has a vision of partnering with banks to use mobile technology to bank citizens and to grow from five million to over 50 million customers. In Africa, Wizzit has already engaged five million people, processed over 100 million transactions and worked with seven banks to offer a bank account that’s affordable, accessible and relevant. Accounts are opened in within one minute and are compliant with regulations. He said Wizzit’s partners have achieved up to 60% higher sales and 20% lower costs with minimal disruption to the banks and their IT departments.
Wizzit partners with banks to provide state-of-the-art mobile technology that integrates into their core banking systems. Richardson said it is a sustainable, scalable and interoperable branchless banking model that provides revenue for its bank partners. He sees an opportunity for banks to focus on the unbanked, which will be a US$1 trillion market by 2015.
- Fair Finance Company (FFC), by board member Faisel Rahman: FFC was set up to challenge unfair lending practices in London, Rahman said, with a target of first getting to 10 million people in the UK who don’t use a bank and then getting to 50 million people in Europe. While it may seem that financial inclusion is not a problem in the UK, he said about 10 million people don’t use a bank and two million use payday loans. They’re a target for loan sharks, who may charge over 1,000% per annum, yet the financially excluded nonetheless choose these lenders. The reason, he said, is that they get a product that comes to their door and that is flexible and totally transparent. They get a personalised, bespoke relationship, just like the very rich. However, it also ensures that the poor remain in poverty.
Rahman said FFC has grown from 10 customers to 10,000, using a model that undercuts the competition and whose level of bad debt is just one-twentieth of that of its rivals. FCC is expanding into savings and insurance. “If we continue growing at 100% it will take 15 years to get to 10 million people,” he said, so he wants to raise billions in order to reach 10 million people in only five years rather than 15. “If we can prove that we can make scalable products,” Rahman said, “that might inspire us to build better products for everyone, and that might lead to a revolution in how banking should engage.” The bank of the future, he believes, will be a social business with a banking license.
- SchoolBank, by Jeroo Billimoria: Netherlands-based SchoolBank, which operates in 89 countries, teaches children about money and helps them open formal bank accounts. “We have 2.2 billion children and young people in the world, and less than 1% have access to financial education and financial services,” Billimoria said. A bank account for an unbanked child gives them confidence and a future.
She estimates that the total of 2.2 billion children could save over €21.6bn per year. The benefits to banks of supporting this market include more accounts opened, lower transaction costs, lower acquisition costs and building a customer base for the future.
To summarise, the social enterprises do indeed present new models for banking, and they have the potential to be win-win-win for traditional banks, customers and the social enterprises themselves. As Yunus said, now may be the time to rethink banking.
Evolving Business Models: Why the Cloud Changes Everything
There has much discussion about cloud computing throughout the four days of Sibos 2012, and SAP gave a presentation that focused on how the cloud is being used.
According to SAP, the public cloud is being used for testing and development. There are also private clouds, either inside an organisation or hosted by a vendor in the vendor’s own private cloud, with the same service level agreements (SLAs) and security. Most applications are in the private cloud.
Organisations are using the cloud to augment their capability, deliver innovative services or improve business user satisfaction. Within financial services, it is most often used for people-related human resource (HR) functions, customer relationship management (CRM), suppliers and finance.
Banks are talking about using the cloud more for bank-to-corporate (B2C) processes. Core functions like settlements and payments and invoicing can, for example, take up to three months or more for corporates to get running, using cloud technology to automate this process can reduce implementation time and costs.
Vendors are also offering new services to support financial institutions and make it easier for banks to do business with corporates. The services, often on a secure private cloud platform, are designed to deliver information in the formats that banks require and help them to process it. The value-added services on the cloud may include payments, card solutions, analytics, trade financing, remittances, reconcilement and other services.
The benefits to banks are that they can expand their customer base and offer new services faster. For corporates, the zero-footprint is more affordable, reconcilement is easier, and there is better visibility and cash forecasting. ON-going administrative fees will, however, apply to those outsourcing their IT.
Bank of America (BofA) provided an example of how the cloud is being used in a large bank. Their goal has been to streamline operations that are currently on multiple systems; 79% of their customers view the cloud as integral to success, and BofA is therefore working on putting more capabilities in the cloud.
The key obstacles to cloud adoption that they have encountered include limited confidence in the cloud, pricing, strategic redirection and a lack of mass corporate adoption. On the other hand, the benefits have included simplification of processes, consolidation of systems, scalability and more timely resolution of errors. Standards to protect information are there, so BofA expects confidence in the cloud to grow.
How Banks can Support the Corporate Supply Chain
A session hosted by IBM presented insights on how banks can better support corporates’ supply chains.
The group has found is that what customers need is to increase working capital, reduce days sales outstanding, get remittance information, decrease processing time, optimise accounts receivable (A/R) and accounts payable (A/P), and manage continuity of the supply chain. However, experience shows that there are often many silos in the financial supply chain (FSC) and services are not well optimised.
What banks need to do is to become more customer-centric, which means creating new products and services to support customer requirements. The first step to deliver more innovative products, IBM suggested, is analytics, so banks can define innovative products. They then need to go through a process of customer, legal, regulatory, operational effectiveness and new product analysis, enabling them to create business models for the new products.
The key takeaway, IBM said, is that by taking a customer-centric view, banks can help their corporate customers anticipate demands for working capital, forecast cash flows, enable relationship managers to discuss adjustments to limits and lines, create synergies between the customer’s data and the bank’s economic and political insights, and mitigate risk of non-payment.
Innovation in Cash Management Solutions
Capgemini’s leader for global cards and payments, Christophe Vergne, provided insights on key innovations his firm is seeing in cash management. Even though the topic is a hot tone it is not experiencing a revolution, he said, so there are still lots of opportunities to invest in new markets and new solutions.
On the bank side, Basel III and liquidity constraints, plus the pressure on capital consuming activities, are all bringing new interest in cash management. Among corporates, Capgemini sees projects to harmonise enterprise resource planning (ERP) across geographies, implement end-to-end processing and improve straight-through processing (STP) rates. While the standards defined in the last decade are making cash management easier, Vergne said, there are still a number of areas where corporates can benefit from new services from banks.
What has probably changed the most, he suggested, is an increased emphasis on different parts of cash management. While yesterday’s technology was about implementing new systems, corporates are now looking at how to benefit from information and data, and trying to invest in the infrastructure for collecting data.
Vergne provided two examples to illustrate solutions that banks have taken to market recently. One is a new system that enables treasurers to receive and initiate transactions through a smartphone or tablet. It was extended to trade finance, and there is also a social community for treasurers to chat with peers on payments related subjects.
A second example is a service to improve analysis of transaction data and balances, with a provisional cash pooling function. The group that implemented the service wanted to take pooling and netting to the next level globally. The vendor provided a non-intrusive cash pooling solution that a bank can offer, with sweep and pooling and notional pooling based on SWIFT standards and with limited integration into legacy platforms.
Closing Plenary: Key Themes
The closing plenary started with a video that showcased everything from key presentations and innovation sessions to compliance and standards Forums plus the highlights from Sibos TV.
SWIFT Middle East and North Africa (MENA) chief executive officer (CEO), Alain Raes, and deputy chairman of the SWIFT board, Stephan Zimmermann, then took the stage to discuss the key themes in evidence at Sibos this year.
One theme was clearly regulation, which was discussed in nearly every session, and Zimmerman said that the discussion has moved from the theoretical debate to a discussion of practical implementation. Raes said that it’s important to have everyone working together, and technology can kick in once there is a common solution. However, as a participant noted in a video, the regulators are one group mostly notable by their absence at Sibos.
Technology was another key theme, with a video interview participant saying that digitalisation, mobile and social media are the key disruptive innovations.
Raes said the four key themes he observed were backward compatibility, simplicity, reusing a single window to gain economies of scale, and investing in the cloud.
Zimmerman commented that what had particularly struck him was the figure US$114bn attaching to cybercrime, which will put pressure on chief information officers (CIOs) to make the business secure.
A third theme was the shift from West to East, with the fact that Asia’s population owns far more phones than bank accounts being especially striking. Zimmerman said what stood out was that Asia will have about 35% of global trade by 2020. There are also a multitude of opportunities around unbanked consumers, mobile technology, and country-specific offerings. Raes said it’s clear to him that the population needs a strong financial infrastructure.
The guest speaker returning for the closing session was Professor Yunus, who gave an inspiring and thought provoking address. While he enjoyed teaching, Yunus said, he got into banking so that he could solve a problem created by the loan sharks. His idea was simple; to spare people from going to loan sharks, he would loan them money. His first loans totalled $27, to 42 people. He said he didn’t realise what enthusiasm this act would create until the recipients looked at him as though he had performed a miracle. “If I can become an angel by loaning $27,” he said, “I could become a super-angel by loaning another $27.” He ended up doing far more and creating a separate bank.
Yunus added that over 50% of his borrowers had to be women; indeed he said saw so much more benefit from lending to them that, today, 97% of his loans are to women and there are about 165 million microfinance borrowers – still small compared to the need.
The poverty of the people was key for him. His goal was less one of making a loan and more of getting the villagers in and to ensure that their children didn’t repeat the cycle of poverty. Yunus made sure the children went to school and saw them moving up the ladder to colleges. He responded by adding an education loan and thousands of the kids ended up going to university.
He likened people in poverty to a bonsai tree. If you put the biggest seed in the forest into a small pot it doesn’t grow, because there’s not enough soil. “Poor people are bonsai people – society never gave them space to grow as tall as others. To overcome poverty, Yunus said, we need to fix our institutions, our policies, our conceptual framework. “The process which creates poverty cannot end poverty.”
Yunus said he is comfortable with the conceptual framework of business being about making money. What he’s not comfortable with is that in the process, the system has converted us into money chasers. Money becomes a habit and an obsession, or addiction, he said, and we don’t know what to do next. “I can understand making money as a means, but not making money as an end.” If the purpose of being here is just making money and leaving money here, he added, it’s a problem. What we need to do is to find out what human beings are all about.
Solving problems is not just about becoming a philanthropist. Giving money to people is great, Yunus said, but the limitation of philanthropy is that money goes and does the job and doesn’t come back, so it’s always dependent on someone else. “You spend more time raising money than doing the job.” What he has done is convert his beliefs into a business formula, so money goes out and comes back. It’s a sustainable cycle – a social business.
Yunus said he has created more than 60 companies, with no intention of making money for himself; rather it had become a habit. “When I see a problem, I create a business to solve it,” he added. One example is Grameen Energy, a company which sells solar panels to give electricity for lighting or other purposes and is about to mark a milestone of reaching one million homes in Bangladesh. Another is a business to cover Haiti with forests, which is also a self-sustaining social business.
Another point he wished to emphasise was that the world is changing very fast. Over the past 25 years, the Soviet Union and the Berlin Wall have disappeared, and China has become an economic giant. We now have a computer centre in our pockets. Over the next 20 years, he said, most of what we have will become totally irrelevant. Everything from universities to banking will be changed beyond recognition. And the young generation will be the most powerful generation in human history, because they’re born with technology in their hand.
“You can change the world if you want to,” Yunus concluded – a powerful message indeed and something he clearly hoped the bankers in the room would take to heart.
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