knowledge area review (kar 015) · the virtues of virtualization virtualization models may provide...
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© Internal Consulting Group 2015 KAR 014 – Brand Portfolio Management
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Knowledge Area Review (KAR 015) Virtualization in Financial Services October 2014
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Virtualization in Financial Services - Content
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Section Component Description
1 Critical Frameworks • What do we mean by Virtualization? • Drivers of virtualization • The decision to virtualise
2 Key Case Studies • Selection of Best Practices cases around the globe
3 Key Articles • Key published articles
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Industry Structure
Business Model
“Execution” Market
Customer Centricity
Channel
Geographic scope
Capability Improvement
Fina
ncia
l Ser
vice
s C
onsu
lting
B2B E2E Ecosystem to
Ecosystem B2C
Vertical Layered (end to end) Platformised Virtualised
In-house Outsourcing Offshoring Extended Enterprise
Agile Enterprise
Products Solutions Advice Insights Outcomes
Physical Copper Wireless / Digital Omni HAL 9000
Context sensitive
uni-channel
Local Regional Multi Domestic
Multi National Balkanised
Anecdotal case studies
Performance bench
marking
Capability Trajectories
Platformised IP
Open source brokered agile
enterprise
B2B2C
P2P
Global
Business models in Financial Services are evolving from vertical to layered, to platformised to virtual
Era Encyclopaedia for The Financial Services Industry
Dimension
Extract
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Virtualization is largely occurring horizontally and vertically
... Transaction Processing ... Client
Services ...
Credit Cards
Debit Cards
Economies of scale/scope vs. process excellence
2
Consolidation benefits highly dependent on the level of global standards/regulations vs. local specifics
1
End to End Value Chains comprised of functions
Product Classes
Home
Auto
Pay
men
ts
Insu
ranc
e
Source: ICG analysis
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Virtualization in Financial Services - Content
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Section Component Description
1 Critical Frameworks • What do we mean by Virtualization? • Drivers of Virtualization • The decision to virtualise
2 Key Case Studies • Selection of Best Practices cases around the globe
3 Key Articles • Key published articles
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What is driving Virtualization?
Customers are becoming more demanding – they don’t care how the outcome is assembled only that they get the outcome • Customer expectations rise,
decreasing loyalty and increasing shopping behaviour (trading up/down)
• Customers better informed • Value of incumbent brands
diminishes • Consumers and businesses
gradually shift FS buying behaviour from consolidation towards open markets
• Customers looking for wrappers and packaging of solution components
CUSTOMER BEHAVIOR TECHNOLOGY
STANDARDISATION GLOBAL DELIVERY
Technology standardisation and commoditisation is increasing ability of suppliers to deliver focused scale offerings at lower cost • Increasing standardisation:
technology, communication, device
• Building blocks for deconstruction of FS value chains largely in place, banks and attackers enabling free exchange of information & value
• Scale-free competition of smaller businesses with large incumbents;
• Emergence of major platform houses and interoperability standards
Incumbent FI’s are finding it increasingly difficult to deliver a universal set of needs
• Regulation increasing in breadth & specificity
• Historical systems landscapes are challenged by faster pace of technology change
• Complex organisations
• Increasing capital requirements
• Increasing product and services breadth
Source: ICG analysis
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Global delivery: increasing complexity and cost for product issuers
Challenges faced by product issuers
Increasing complexity of regulation
• Regulatory compliance continues to become more complex (consumer protection, AML, FATCA, Privacy etc), and places an increasing burden upon financial institutions.
• Compliance represents a significant cost for small issuers, and may use up a significant component of the (already stretched) development budget
Faster technology and innovation cycles
• Market leaders and nimble new entrants continue to introduce product and service innovation (in particular via digital channels) driving heightened consumer expectations
• Issuers are facing competitive pressure to match product innovation cycles • Many issuers operating with outmoded or legacy systems may need to decide
whether to replace, to workaround or else to outsource
Data privacy, fraud and operational risk
• Data security and fraud represents an increasing challenge to product issuers who need to have sufficient risk mitigation solutions in place to avoid data theft and leakage
Return on capital • In-house models may not longer represent the most efficient deployment of
capital, due to CAPEX, OPEX and balance sheet demands in running competitive end-to-end business
Source: Capgemini: “Should Issuers Outsource or Process Inhouse”; ICG analysis
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Technology standardisation: driving aggregation models
Full-service industry giants
Transaction aggregator models
• Enables aggregation for scale businesses (eg. credit cards)
o Under wholesale model, industry giants leveraging their existing technology and operational infrastructure to provide upstream services to other financial institutions (including direct competitors)
o Under white-label solution, provides alternative distribution channel giving access to customer base sitting outside core brand
• Specialist aggregator models driving scale outsource solutions over traditional core banking functions (eg. transaction processing)
• Includes membership based models established as mutual structures to facilitate scale models for members FIs
• Functional specialists provide outsourced service solutions for ancillary functions
• Examples include: call centre, loyalty program management, plastic and statement production, collection
Functional outsource models
White-label model (B2C) Wholesale banking services (B2B)
Member-based model Vertical niche plays
Source: ICG analysis
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The virtues of virtualization
Virtualization models may provide product issuers with a range of business benefits, including: • Low-cost: efficient and scalable business operations resulting in improved cost to income • Value-add: access to market-leading functionality, or other value-added services (eg. analytics) • Omnipresence: expanded range/reach and integration of multiple platforms
Source: Capgemini: “Should Issuers Outsource or Process Inhouse”; ICG analysis
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Three Drivers of Virtualization A potential framework for understanding potential for virtualization
Breadth & Depth of Standardisation
Transaction Intensity
Pace of Change
• Degree of standardisation of products, contract terms, transactions, change events;
• Variety (complexity) of offer & relevant customer data is a counter force
• Reach of standardisation across geographies • High transaction volume tends to lead to to greater
opportunity for automation • Over time, as technology becomes more
affordable, and end-to-end processes or functions are being automated from the bottom up (functional level);
• Increasingly complex markets & transactions are being automated
• Markets with high pace of change in the offer, competitive dynamic & regulation require significant continuous investment in change making it difficult for smaller institutions to afford to compete, creating market opportunities for vendors
• High fixed cost business, with transaction intensive elements already automated with low rates of change tend to make poor business cases for virtualization
Breadth
Local Global
Depth
Transaction only
Value Chain
Volume
Few Txn Many, many Low Value Txn
Offer
Slow, Mature
High & Dynamic
Competitors
Slow Rapidly chaniging
Regulation
Slow Rapidly chaniging
Value
Few Large $ Transactions
Many, many High profit Txn
Source: ICG analysis
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Consumer financial product hierarchy Product Class/ Type / Component
Retail Banking Products & Services Risk and Wealth Products and Services
Adjacent Services Loans Banking and
savings Cards and Payments
Services and touchpoints Risk Wealth
Advice and Services
Home Loans • Standard • Line of Credit • Package • Offset • Reverse • Home equity loan • Low doc
Transaction • Transaction • Cash
management • Evetyday banking
Credit Card • Basic • Rewards • Premium
Transaction channel • Cheque • BPAY • Money order • ATM • Digital
General • Home and
Contents • Car • Landlord • Travel • Loan Protection
Investment • Shares • Funds • Annuities • Hybrids • Alternative
investments
Financial Planning • Advice
Digital Banking • Mobile apps • Digital payments • Omnichannel • Social Networking
Personal Loans • Term loans • Line of credit • Personal overdraft
Deposits • Term Deposits • Savings • Online Savings
Debit Card Travel and FX • Relocation • Foreign currency • FX • Travel money • International
transfer
Life • Life • TPD • Income
Superannuation • Retail • Corporate • SMSF
Private Banking
Education • Seminars • Webinars • Financial education • Youth products
Other loans • Secured/ unsecured car
loans • Asset loans
Other Cards • Prepaid • Travel Card
Digital Services • Online • Mobile
Gearing • Margin Loans • Structured
Products
Platforms • Wraps • Platforms
Insight • Cashflow management
tools • Data access • Budgeting and savings tips • Goal-setting
Overdraft • Personal • Temporary
Equities • Broking
Source: ICG analysis
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Within consumer financial products high potential for virtualization across credit cards, insurance and online broking
Size of bubble= intensity of change
Tran
sact
ion
Inte
nsity
Depth & Breadth of Standardisation
Debit Card
Deposits
General Insurance
Life Insurance Transaction Account
Home Loans
Credit Cards
Personal Loans
Managed Funds
Wraps and Platforms
Private Banking
SMSF
Full Service Broking Investment Loan
Superannuation
Financial Planning
Online Broking
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Traditional Core Banking Products & Services Extended Shelf Financial Products 4C) Emerging IT enabled Adjacent Services
Capital Access
Transaction Banking Payment Trade Service Risk Markets Wealth
Std. Loans • Secured • Unsecured
- Overdraft - Line of Credit - Revolving
Account • Transaction • Savings (time &
performance) • Fx Accounts
Cash • In/Out • Money Order • Foreign currency
xchange
Traditional • Letter of Credit • Import/Export • Confirmations
Security & ID • KYC • ID / Sign-on • Device (card)
Derivatives • Futures • Swaps • Other
Foreign Exchange
Fixed term • Term Deposit • Bank paper,
Commercial Paper
Market Access • Social Networking • Collaboration &
Service clubs • Foreign market
Introductions
Asset Finance • Vehicles • Specialised
Equipment
Physical Cash • Business
Deposits • Lock Box
Domestic Debit Pmt • Bill Present • Bill Pay • Direct Debit
Collections • Invoice finance
Signatures & Authorities • PKI / signatures
Guarantees • Stand-by LoC • Docu. Credit • Surety (bonds)
Commodities Money Market funds
Education • Closed • MOOC
Invoice / Receivables finance • Factoring /
forefeighting
Consolidation • Sweeping • Pooling • Liquidity Mgmt • Collection
Credit Pmt • Credit card • Corp card
Open Account • Inventory • Prepayment • Collection
Visibility • Transactions,
balances
General Insurance
Exchange traded instruments
Structured • Money market • Trust funds • ETF’s
Staff Services • Onboarding • Payroll
Specialised & Syndication • Bridge finance
Control & Advice • Positive Pay • Forecasting
Cross-border • Pre-paid Travel • X-border payment
Structured trade finance
Advice • Capital Structuring
Life Insurance Interest Rages Employee Super Insight • Benchmarking • Analytics • Consulting
Markets • Equity issuance • Debt issuance • Alternative finance
(PE, VC) • Advisory
e-Currency Merchant Acquiring • Terminal
Digital services Trade Credit Insurance
Specialised: • Carbon, emmisions • e-Currency
Securities Trading
Software & Platform services • Supply chain
orchestration • Trade & Customs
documentation • Market-places
Business Banking Product/Service Hierarchy Product Class/ Type / Component
14 Source: ICG analysis
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Collective impacts of emerging industry dynamic on Business Banking Traditional Core Banking
Capital Access, Transaction Banking, Payment, Trade, Service
Extended Shelf Financial Risk, Markets, Wealth
Emerging IT Services Wealth
1. Global Financial Crisis & Resul4ng Regula4on
2. Technology
3. Macro Economic Shi?s
4. Customer Behaviour
• Reduced availability of credit borrowers • Higher capital and operating costs for banks • Lower returns for depositor • Banks shift to customer centricity (capital lite) • Regulators lower barriers to exit • Emergence of iT enabled services to directly match
supply and demand of capital
• Compressed margins for banks • But rapidly growing forced ‘retirement’ saving
increases integration of wealth & comm. banking
• Alternative lenders secure new data sources to provide predictive behavioural insights
• Gov’t incenting & participating in alternative capital markets via venture & sovereign funds
• IP connectivity creates opportunity to increase richness & reach between the supply/demand of capital
• Reduced cost to build businesses, & dramatically potential to scale business and reach (cross border instances)
• Enabling business models which directly match investors & capital demand;
• Dis-intermediated access to investors and customers
• New intermediaries emerge to cut-out banks in FX transactions and other commodity markets;
• Ability to scale business models across borders, around the world
• Information based services like benchmarking, and analytics
• Increased externalising of plug-n’-play services
• Battleground for wining merchants – funded offers & location based services
• Growing presence of mid- sized borrowers • Shift of commerce to Asia (imports, exports) • Growing regionalisation vs. globalisation • Potential for economic stability, with increased volatility
along the way
• - Potential for shift in global Reserve currency • Growing demand for FX, capital mobility • Growing demand for wealth products in Asia
• Growth in alternative capital sources
• Growth in capital exchanges, non-bank intermediaries
• Prepared to shop • Digital access/mobility • Always on convenient access requirement • Value-added info • Direct access
• Prepared to shop • Digital access/mobility • Info on a page/ipad • Value-added info • Direct
• Cloud services (accounting etc.) intermediate bank relationship
• Virtual currencies • Loyalty monetisation • Emergence of ‘consortia based
information services’ such as AIMIA, Argus & Quantium
15 Source: ICG analysis
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Within business banking products high potential for virtualization across merchant acquiring, payments and trading products
Size of bubble= intensity of change
Depth & Breadth of Standardisation
Tran
sact
ion
Inte
nsity
Customer ID & KYC
FX Account
Standard Lending
Domestic e-Payments
Derivatives Trading
Advisory
Pensions & SuperAnnuation
Specialised Lending
Collections/Recoveries
Traditional Trade Finance
Foreign Exchange
Credit Cards
Global Custody
Cash Management
International Payments
Exchange Traded Funds
Merchant Acquiring
Open Acct. Trade-Finance
Equity Trading
OTC Trading
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Virtualization in Financial Services - Content
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Section Component Description
1 Critical Frameworks • What do we mean by Virtualization? • Drivers of virtualization • The decision to virtualise
2 Key Case Studies • Selection of Best Practices cases around the globe
3 Key Articles • Key published articles
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There are a range of virtualization models, from blended to white-label product issuance
Scale of Operations Outsource
In-house Model Full Operational Outsource
White-label virtual model Functional Sourcing
• Key functions performed internally – business hosted through proprietary client and data management system
• Third party provides support for specialist non-core functions only (eg. debt collections, card manufacture)
• Typically utilised by scale institutions for core businesses
• Mix of in-house and full-service outsourcing model.
• Basic processing operations are performed in a self-administered structure and resides on a vendor platform.
• Selected outsource of operation functions (eg. call centre, rewards program management) while other operation functions performed in-house.
• Full end-to-end outsource of operations and servicing to specialist provider or scale institution.
• Ownership retained over product issuance, regulatory compliance, risk management and P&P
• Service Fee arrangement
• White label provider assumes responsibility for legal and financial ownership of business, product issuance, risk management and balance sheet.
• Outsourcing institution retains brand, and responsibility for origination, and in-branch servicing only
Outsource Model
Description
Commercial Model Service Fee arrangement Upfront/ongoing commission or profit share arrangement
Balance Sheet Legal / Compliance
Transaction Processing Servicing
Data management
Risk Management Product Issuance
IT systems Ancillary Functions
Functional Responsibility
Legal / Compliance
Transaction Processing Servicing
Data management IT systems
Ancillary Functions
Transaction Processing Data management
IT systems Ancillary Functions
IT systems Ancillary Functions
Source: ICG analysis
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Four decisions to make
Whether to outsource? (product/ function analysis) 1 What outsourcing / virtualization model? (business model for sourcing) 2
Which outsourcing provider? 3
How to ensure ongoing success 4
Source: ICG analysis
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Target Operating Model Business Architecture
Use a standard approach to identify value available from internal improvement v. outsourcing
Sourcing architecture
Activity Screen
Map activities and classify to identify analytical focus
Internal Improvement Opportunity
Size
Cor
e N
on-c
ore
Internal Unique
Common Standard Elements
Degree of Standardisation (consistency internal/external)
Strategic importance Compare potential sourcing savings
value to process improvements
Prioritize &
aggregate m
odel choices
Automate using STP
Pool workflow, routing
Standardize, Lean Consolidate
Workflow, BPR
Quality Level 1
Process Complexity
2
Labor Productivity variance
3
3 Criteria
• Internally consistent • Aligned with firms business
& organisational model
Outsourcing - Offshore
Outsourcing - Onshore
Proximity requirements
1
Process readiness
2
Organizational readiness
3
3 Criteria
Whether to outsource?
Source: ICG analysis
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Screen to identify best improvement lever and estimate value potential for internal improvement
Quality (Input/output error rate)
If process quality is low improve through redesign 2 models for redesign • IF productivity variance is high, and
source of quality issue is internal à identify & leverage best practice
• IF productivity variance is low à Conduct e2e lean redesign across boundaries to simplify and improve input quality including
Plus change in ownership to consolidate under common governance Improve performance transparency through targets and metrics
Labor Productivity (Range & σ2 )
Pool labour to address supply/ demand capacity mismatch • If labor productivity var. is low à
create center of competency, use workflow and BPR engine to automate simple tasks
• If labor productivity var. is high à pool labor, multi-skill to address supply demand mismatch; segment process flow and apply skills based routing to optimize highest skilled labor
Process complexity (Task or skill ambiguity)
Assess inherent complexity of process and tasks for STP and automation potential
• Clear, defined expected outcome • Judgment or unique business/reg.
knowledge required • Documentation, training manuals
exist? • Inputs and interfaces between
counterparties automated? • Metrics to measure success?
If complexity is low à • Assess opportunity for STP
automation (e2e), if not feasible move to next lever
High Q
uality Processes
Com
plex Tasks
Simplify, Standardize, Consolidate STP Automation
1 2 3
Pool & work based routing
Workflow and BPR
Whether to outsource?
Source: ICG analysis
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Outsourcing/offshoring applicability diagnosed in 4 steps
Assess processes along sourcing possibility criteria
• Location • Similarity
• Estimate size of the prize • Group processes by potential
sourcing model • Resulting cost benefits • Operating costs comparison • Assess potential investment
Ben
efits
Cor
e N
on-c
ore Strategic
importance
Assessment of • Cultural requirements • Organizational requirements
Assessment of • Process complexity • Skill availability
Common Standard
off-s
hore
O
nsho
re
On
site
Assess Possibilities
1
Skill Availability
Pro
cess
Com
plex
ity
Low
High
Process Readiness 2
Org
aniz
atio
nal
requ
irem
ents
Cultural requirements
Org. Readiness 3
Benefit Evaluation 4
Sourcing opportunities need to be compared
against process improvement value
Size
Internal Unique
Common Standard Elements
Degree of Standardisation (consistency internal/external)
SOURCING ARCHITECTURE ASSESSMENT ACTIVITY SCREEN
Whether to outsource?
Source: ICG analysis
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Economies of scale differ for each function along the value chain Example credit cards
Issuing sales, marketing & credit risk
Contract Initialization/ Maintenance
Transaction Processing
Client Account handling (statements)
Exception handling (charge back, fraud, bad debt collection)
Client services (call center)
Support functions to issuer
Contract Initialization/ Maintenance
Scale factor: 75-85%
unit cost
transaction volume
Transaction Processing
Scale factor: 65-75%
unit cost
transaction volume
Client services (call center)
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Scale factor: 90-95%
unit cost
transaction volume
Whether to outsource?
Source: ICG analysis
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Each function, chain must be evaluated for its current and potential degree of commoditisation
Source: Capgemini: “Should Issuers Outsource or Process Inhouse”
• Banks often commence their virtualization journey with selective outsource of commoditised functions
• As the outsourcing relationship matures, more complex functions can be outsourced
Whether to outsource?
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25 Source: ICG Analysis
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
For banking products with large fix cost base, outsourcing is an attractive option for sub-scale players
ECONOMIES OF SCALE
Whether to outsource?
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Example: credit cards outsourcing
Source: Capgemini: “Should Issuers Outsource or Process Inhouse”
• Outsourcing of processing activities is common in credit cards
• As issuers decide which functions to keep in-house and which to outsource, they need to review activity from the perspective of their own capabilities and what third party providers have to offer
Whether to outsource?
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Maximum level of consolidation in payments highly dependent on standardization of schemes and formats
Operations
Infrastructure
Domestic Domestic Domestic
High-value High-value High-value
X-border X-border X-border
Country A Country B Counry C
Operations
X-border
Trade Finance
Infrastructure
Operations
Domestic Country A
Domestic Country B
Domestic Country C
X-border
Trade Finance
Infrastructure
High-value
• Consolidation of x-border payments processing platform and trade finance processing
• Consolidation of interfaces to EBA-Step 2, TARGET, and others
• Consolidation of non-€ clearing and bundling to global clearer (money center bank)
• Consolidation of static data mainte-nance and other admin. tasks
• Consolidation of key market interfaces in the Group
- S.W.I.F.T., CLS, etc.
• Selective consolidation of redundant nostro account relationships
+
+
+
+
• Consolidation of individual domestic payments platforms
• Consolidation of respective account-related services (for example, claims management)
+
+
Trade F. Trade F. Trade F. High-value
Domestic €
INFRASTRUCTURE SHARING TACTICAL INTEGRATION STRATEGIC / COMPREHENSIVE
INTEGRATION
Whether to outsource?
Source: ICG analysis
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Virtual models require a seamless customer experience across all touch-points
28
Sales & Servicing
Supporting Technology Services
Process Mgmt, Workflow Content & Document Mgmt, Imaging Integration Services Infrastructure & Network Security
Enterprise Services Risk Mgmt Performance Mgmt Resource Mgmt
Corporate Mgmt
Finance
HR
Sourcing
IT Services
Property
Strategy
Compliance
Channels (Self & Assisted Service)
Access/Information Portals & Authentication
Online
ATM
IVR
Mailhouse
Retail Branch
Call Centre
Broker
Mobile Banking
Cha
nnel
Mgm
t & P
latfo
rm
Offer & Product Mgmt
Information Mgmt
Product Processing
Customer Segment-tation
Offer Design & Mgmt
New Prod. Develop-ment
Pricing Mgmt
Marketing, Campaign Mgmt
Lead & Opportunity Mgmt
Needs Analysis, Illustration, Modelling
Customer Relation-ship Mgmt
Operational Customer Info Mgmt
Analytical Customer Info Mgmt
3rd Party Info Mgmt
MIS
Market Data
External Gateways & Portals
Ser
vici
ng (E
nqui
ries,
Com
plai
nts)
Orig
inat
ion/
Dat
a C
aptu
re
Decision Mgmt
Contract & Account Mgmt
Document Production
Settlement & Fulfilment
Cro
ss-P
rodu
ct P
roce
ssin
g
Utilities
Payments
Collateral
Custody
Statements & Billing
Interest Calc
Collections
Reconciliation.
Pricing
Commissions Product Lifecycle Mgmt
Strategic Sourcing
Transaction Accounts
Lending
Deposits/Savings
Master card/Visa
Loan Insurance
Wealth and GI
Credit cards
Business banking /Leasing
Debit
Debit
Source: ICG functional banking model
Which outsource model?
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The evolution of outsourcing from ITO to KPO The emergence of Knowledge Process Outsourcing
• KPO enables clients to unlock their top-line growth by outsourcing their core work to locations that have a highly skilled and relatively cheap talent pool • KPO is about “intellectual arbitrage”. This differentiates KPO from ITO or BPO, both of which emphasize cost arbitrage. KPO is characterized by niche offerings,
highly skilled staff and a relatively small scale. It cuts into the traditional “core competencies” of many organizations
• Knowledge processes are fundamentally different from business processes, with clear differences in process complexity, skill sets and scalability
• Organizations with experience in outsourcing IT and business processes have a shorter learning curve when entering into KPO
• Activities that are analytical skills-intensive are expected to be increasingly outsourced going forward as KPO providers prove their execution capabilities. Activities that require high domain expertise will likely be at the lagging end of the outsourcing curve as service providers make concerted efforts to acquire these skills.
• Decisions about outsourcing may be accelerated to preserve and increase competitive advantage
• “Boutique” providers will likely leverage KPO to create new services and offerings • The KPO industry’s staff qualifications and skill-set requirements are significantly different from those of the BPO industry. This requires KPO providers to develop
specialized recruitment and retention strategies
• The location selection for KPO should take into account the nature of knowledge process work, skill sets, and supporting educational and certification organizations which are expected to produce a supply of talent in the selected location
• India is currently the leading country providing KPO services. However, other countries have the potential to capture significant KPO market share, by better leveraging the depth and maturity of existing skill sets, and in some cases, their non-English language capabilities.
• Within the KPO industry, legal and compliance departments are currently under resourced and inadequately empowered. This has implications for managing insider trading, conflicts-of-interest, intellectual property and professional indemnity liabilities
FROM ITO TO KPO
ITO (IT Outsourcing) BPO (Business Process Outsourcing) KPO (Knowledge Process Outsourcing)
Low Complexity High Complexity
Source: “Knowledge Process Outsourcing”, KPMG 2008
Which outsource model?
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Offshoring/Outsourcing evolution The emergence of Knowledge Process Outsourcing
30 Source: “Knowledge Process Outsourcing”, KPMG 2008
• KPO represents the latest step, in a continuous multi-decade process of value creating strategies, with respect to a typical financial institution’s back and middle offices
• The existing capabilities of ITO and BPO captives and third-party vendors to handle outsourced work
• The availability of high quality and often certified talent (as opposed to sheer numbers) in offshore locations
• Moves to extend sourcing strategies beyond traditional comfort zones
• The relatively standardized nature of the analytics involved in KPO activities
• Global recognition of standards, qualifications, skills and experience required to perform analytical functions
• The continuing push towards global sourcing by many banking and insurance organizations, in the march for greater efficiency and improved economies of scale
• Improved remote project management capabilities, owing to an increased sophistication in telecommunications and other enabling technologies
FROM ITO TO KPO KPO IN FINANCIAL SERVICES DRIVERS
Which outsource model?
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KPO characteristics in financial services Geographical footprint of the financial services KPO industry
31 Source: “Knowledge Process Outsourcing”, KPMG 2008
• Positive-correlation between sourcing maturity and geographic diversification
• A number of demand side, supply side and macroeconomic drivers will aid the process of the geographical expansion of the KPO industry
• Although India remains the number one KPO destination, our research suggests other countries possess the necessary characteristics which qualify them as potential financial services KPO destinations over the next few years
TOP KPO DESTINATIONS
KEY INSIGHTS
• Insurance and actuarial • Equity research and investment banking
• Corporate credit, structured and project finance
• Group-wide shared function
• Retail banking and marketing
KPO IN THE FINANCIAL SERVICES INDUSTRY
Which outsource model?
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Offshoring/Outsourcing evolution Global financial services organizations continue to consolidate and establish shared service captive centres for KPO activities
32 Source: “” Swamy and Associates, Knowledge Process Outsourcing”, KPMG 2008
• A realization of the relatively standardized nature of the analytics involved in typical KPO activities, their underlying methodologies and software platforms
• The ever increasing global harmonization of standards, qualifications, skill sets and experience requirements for undertaking analytical functions
• A seemingly unstoppable push towards global sourcing strategies at most major banking and insurance organizations
• Technology and telecommunication developments, including advances in information security, have enabled the globalized delivery of services, and has reduced the reluctance to outsource and offshore
ITO, BPO AND KPO SERVICE PROVIDED KPO RISE DRIVERS
Which outsource model?
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Offshoring/Outsourcing evolution The KPO industry is distinct from the BPO Industry with clearly separating factors
33 Source: ”Swamy and Associates, Knowledge Process Outsourcing”, KPMG 2008
• KPO is knowledge intensive while BPO involves common processes with standard procedures and templates
• Intensity and complexity of KPO work varies, demanding different skill sets
KEY DIFFERENCE BETWEEN BPO AND KPO KEY INSIGHTS
DIFFERENT SKILL SETS ACROSS KPO ACTIVITIES
Which outsource model?
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Offshoring/Outsourcing evolution Outsourcing and Australian Banks – Present and Future
34 Source: Swamy & Associates, CIRA, Citigroup, 2011
Currently traditional IT (ITO) still constitutes 60% of outsourcing arrangements, with product related BPO and analytical activities still underdeveloped areas
OUTSOURCING ROAD MAP – MIX OF DEALS IN AUSTRALIAN FINANCIAL SERVICES
Which outsource model?
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Offshoring/Outsourcing evolution Current outsourcing relationships amongst Australian banks
35 Source: secondary research
Which outsource model?
ANZ WESTPAC NAB CBA BOQ
• ANZ has adopted a ''captive'' offshoring strategy where it directly employs staff in lower-cost Asian countries
• Recently opened new ''operations hubs'' in Manila (credit risk) and the Chinese city of Chengdu to go with a long-established centre in Bangalore
• Selected BPO giant Genpact to demonstrate its abilities to run human resources and back office services, as a precursor to plans to outsource work in the future
• Areas that will be outsourced:
Ø Learning and development
Ø Workforce administration
Ø Payroll functions
Ø Benefits administration
Ø Technology systems to manage and analyse employee data
• MLC, the wealth management division, is on the hunt for a third party provider as it is possibly considering outsourcing its IT and back office services that includes
Ø Technology Ø Portfolio
management
Ø Credit control
Ø Self-managed super funds
• Sent an expression of interest to 10 potential tech suppliers, including IBM, Accenture, HCL Technologies, and Wipro
• Only one of the big four that has not opted for much offshoring
• Saved tens of millions of dollars over the past 12 months thanks to Amazon Web Services' cloud computing capabilities
• Currently outsourcing ITO to HP
• Looking to change to four possible candidates:
Ø Capgemini
Ø Dimension Data
Ø Indian player HCL Technologies
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White Labelling Successfully launching a new white-label business demands a focus on three key areas
36 Source: “White Labeling: “White Hot” Opportunity for Payments Players”, Accenture 2014
1. Identify the white-label sweet spot • Scope of white-label capabilities is expanding
• Adjacent capabilities in the commerce lifecycle are next in line
• There are now numerous examples of white-label offerings focused on loyalty and rewards management, digital couponing, analytics and mobility
• Further expansion is now coming in fraud, risk management and compliance
2. Solve for unmet customer needs • White-label offerings must be laser-focused on solving customer
problems
• The business and operating model should be designed around existing customer use cases that remove customer cost or risk, or that enable new customer facing capabilities that can drive customer revenues
• Properly designing the offering around customer value helps drive initial sales and create a foundation for sustaining long-term customer relationships
3. Design for rapid and seamless integration • White-label businesses must rapidly on-board and integrate with new
customers
• Requires an intimate knowledge of customers’ business needs, processes and technology infrastructures.
• Getting the integration process right lowers the switching costs for customers, increases on-boarding speed for new businesses, and shortens time to market so all stakeholders realize benefits faster
KEY FRAMEWORK KEY AREAS
Which outsource model?
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The perils and risks of outsourcing / virtualization
Loss of control
Customer experience and
consistency
Strategic lock-in
Threat to security and confidentiality
Description Mitigant
Source: ICG analysis
Transferring business functions or entire business lines to an external provider inevitably results in a reduction of control over multiple facets of the business for example : o Customer service o Compliance o Product/IT development and release cycle o Brand representation
Outsourcing is difficult and costly to reverse and results in a lock-in to the strategic growth pathway (innovation and technology development roadmap) and financial performance of the white label provider. Risks include: o Technological obselescence o Financial risk (bankruptcy etc of service provider) o Bad publicity, ill-will etc.
Ceding control over customer service to a third party impacts on an organisation’s ability to offer a seamless and consistent customer experience across all products and channels and potentially creates friction across customer interfaces.
If the outsourced function involves sharing proprietary or customer data there is a risk that data security may be breached or compromised.
Loss of control risk can be mitigated (though not eliminated) through appropriate contractual provisions and SLAs, and backed by a strong governance structure. Outsourcing organisation should retain sole responsibility for brand representation - no use of brand permitted without consent.
Difficult to mitigate this risk, however outsourcing party should retain right to terminate contract in event of material breach (including financial stress/bankruptcy)
Can be managed through careful selection of outsourced service provider, and appropriate penalty clauses which trigger in the event of breach.
Outsourcing solution should be carefully developed so that it results in a seamless customer experience. Customer interfaces wherever hosted should display consistent data. Call centre handoffs should be minimised.
Ensuring success
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Customer experience and consistency On-line customers are used to a high quality cross platform customer experience
38
PAIN POINTS TO AVOID KEY DECISION DRIVERS
Product Delivery
• Not in-time delivery • Not leaving a delivery sticker
• Not following up with the client in case of missing delivery
Product fit
“How do I make sure I’m not underinsured?”
Description Voice of the Customer
Seamless platform
connectivity
• Easy to use ecommerce platform
• Easy to use payment method
• Easy check out form
Price and Service
“Asos had by far the cheapest prices – for exactly the same item!”
Description Voice of the Customer
“I wasn’t at home when the shoes were delivered – and they didn’t’ let a note. No way for me to track down the shipping”
• On-line product delivery requires simple products to be understood
• The more details and explanation provided, the better
Customer Care
“I spent one hour on the phone for the second time – and I had to repeat my story all over again!!”
• Representatives with bad accents / difficult to understand
• Long waiting times
• No tracking of customer claims
Product Description
• Good and reliable product description
• Videos showing the product • Review by former clients
“It was easy to compare several items, and the video description helped a lot”
“I don’t understand which loan fits me better”
“Paying through PayPal on Livingsocial was extremely easy and quick – just a click away!”
• Cheaper price easily wins • Not the only decision maker
though – service is important too
“Wine wise prepared an amazing birthday package for my friend – and delivered it on time!”
Online customers are used to a constantly improving customer experience, since every website keep innovating and simplifying processes
“I expected this shoes to be red, not orange!”
Source: ICG analysis
Ensuring success
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Key Success Factors – White Label Partnership
Partnership Compatibility • Trust can be most easily maintained between organisations
that operate in different parts of the value chain – and aren’t direct competitors (although there are exceptions eg Westpac broking services outsourced to CBA)
• Partners should have compatible cultures and operating rhythm
Financial Sustainability • Financial terms sustainable for both parties under various
market scenarios (excessive clawbacks/ penalties might mitigate risk for one party but are unlikely to sustain an effective partnership)
• Financial terms should be aligned to each parties’ business objectives (eg. a volume-based bonus won’t be an effective driver for an organisation entering into a partnership for service-related rather than financial objectives)
Collaborative relationship management and effective governance • SLAs should be agreed and monitored • Appointment of relationship manager for both parties • Joint goal-setting. Regular meetings to monitor progress and
each partner’s objectives. Customer and financial non-financial metrics
• Known escalation points.
Strategic Alignment • Each partner should be clear about its goals and key
drivers – and these should be respected by the other partner
• Consider macro-level goals, granular outcomes and key success factors – and make these transparent
Seamless Customer Experience • Outsourcing solution should be carefully developed so
that it results in a seamless customer experience. Customer interfaces wherever hosted should display consistent data. Call centre handoffs should be minimised.
• White-label provider branding should be eliminated or limited to minimum legal requirements.
• Structured customer comms through change process.
Ensuring success
Source: ICG analysis
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White Labelling How to select the right white label partner
40 Source: “Financial Times”
• Vendor selection requires a multifaceted, multistage methodology to evaluate not only what a service provider can do, but also how it’s done
• Searching for the right vendor can be tedious. Many providers that meet defined criteria prove unsuitable for myriad reasons. Months of studying prospects, conducting site visits, and negotiating costs may result in frustration and the temptation to quickly close a contract that ends in dissatisfaction
• A well-organized vendor selection process usually spans 6–12 months and ranges upward of 2% of the annual cost of the project
• Costs associated with vendor selection include analysis and documentation of requirements; creation, distribution, and evaluation of Request for Proposal (RFP); contract negotiations; and development of service level agreements (SLAs). Then there are the project leaders, staff, outside consultants, and lawyers who need to be paid
• Organizations should stick to a well-established methodology that clearly defines each step of the journey
• At the end of the process, the goal is to select the best service provider for delivering the desired outsourcing outcome
KEY FRAMEWORK KEY INSIGHTS
Ensuring success
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White label arrangements can fail to meet expectations when success factors not met
Westpac and Virgin Money Australia Woolworths and HSBC
• In 2003, Westpac and Virgin Money Australia signed a 5-yr partnership to issue VMA-branded credit cards (Westpac as issuer)
• Despite originating 560,000 account in five years (achieving 6% market share), the deal was not renewed
• Reasons for termination included:
• Westpac’s financial returns under the partnership structure were insufficient to justify ongoing investment
• Westpac’s strong growth of its core cards business meant that the VMA card was less strategically relevant
• Deepening competition between Westpac and VMA across cards and other products (mortgages and super)
• Outcome: Virgin elected not to buy-out the portfolio, which inn 2008 was re-branded by Westpac as “Westpac Ignite”; Virgin subsequently launched a competing card in partnership with Citibank
• In 2009, Woolworths and HSBC launched a 5-yr partnership to issue Woolworths-branded credit cards (HSBC as issuer), with option to renew
• At a global level, HSBC Global announced in May 2011 a significant overhaul of its business including reducing the presence of white label offerings globally based on a reassessment of capital allocation.
• In 2014, the Woolworths card scheme was terminated. It is understood the decision to sell was related to the global strategic realignment.
• Outcome: Woolworths conducted an RFP process and selected Macquarie Bank as issuer. Macquarie purchased the $360M balance sheet from HSBC, adding to its suite of white-label card products.
Source: internal analysis, secondary research
Ensuring success
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Virtualization in Financial Services - Content
42
Section Component Description
1 Critical Frameworks • What do we mean by Virtualization? • Drivers of virtualization • The decision to virtualise
2 Key Case Studies • Selection of Best Practices cases around the globe
3 Key Articles • Key published articles
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Case studies: Outsourcing Providers The map shows the identified case study by solution and product simplicity
43
Low
High
PRODUCT CLASS STANDARDISATION
Functional Sourcing Full Operational Outsource
White-label virtual model
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Case studies: Outsourcing Users The map shows the identified case study by solution and product simplicity
44
Low
High
Functional Sourcing Full Operational Outsource
White-label virtual model
PRODUCT CLASS STANDARDISATION
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Providers: Amerisource Offers a private label bank servicing program for asset-based lending and A/R factoring
KEY INSIGHTS BUSINESS PROPOSITION
Source: “http://www.amerisourcefunding.com/Services/Services-for-Referral-Partners/ABL-Private-Label-Bank-Program”
• Founded in 1984 ,one of the leading provider of working capital financing for growing businesses throughout North America
• Offers an innovative private label bank servicing program for asset-based lending and A/R factoring
• One of the largest and most sophisticated back-offices in the business
• Depository relationship and lockbox of all borrowers stay with the client bank
• Private label branding, including dedicated phone lines
PRODUCT OFFERING
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Providers: The Bancorp Provides private label banking and technology solutions for non-bank companies
46
• Creates customized banks for hundreds of affinity partners, setting a new standard in financial services innovation.
• Provides private-label banking and technology solutions for non-bank companies ranging from entrepreneurial start-ups to those on the Fortune 500
• The Bancorp's private-label programs focus on four main business segments:
Ø Healthcare Solutions Ø Payment Solutions Ø Payment Acceptance Ø Institutional Banking
• These "branchless banking" programs enable members, employees and customers of affinity partners to access online banking services, customized for them, under the affinity partner’s brand
• In addition to these programs, The Bancorp offers a full array of lending services Ø Commercial Lending
Ø Fleet Management
Ø Leasing and Government Guaranteed Lending
CLIENTS THE BANCORP
Source: secondary research
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
120 established relationships with a variety of clients nationwide
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Web Bank Offers closed-end and revolving private-label and bank card financing programs
47
• Headquartered in Salt Lake City, Utah • FDIC-insured, state-chartered industrial bank that provides
customized consumer and commercial financing solutions on a nationwide basis
• Full range of banking activities including making loans, issuing credit cards, and taking deposits that are federally insured
• Philosophy is to provide personal touch, direct contact with management, quick decision making and flexibility paired with sophisticated financial solutions.
• Offers the advantage of financial solutions that can grow a business, support capital investments, fund ventures, increase profitability from customers or increase geographic customer base potential.
• Can assist with varied financial solutions and fiscal management
CARDHOLDER AGREEMENTS
WEB BANK
Source: secondary research
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
• The Bank originates and funds primarily consumer and commercial (small to medium size business) private-label (closed-loop network) and bank card (i.e. MasterCard/Visa) programs
• The following is a high-level breakdown of product offerings that are supported by the Bank:
PRODUCT OFFERING
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Saxo Bank Offers multi-asset trading, risk management and trade settlement technology to financial services firms
48
• A bank will retain complete control over its customers using the platform and 100% ownership of all client and prospect information
• A fully branded and customised trading solution accessible seamlessly across multiple devices
• Customer access to their trading account with the same login from a desktop, any internet browser, smartphone and tablet
• A multi-asset offering with +30,000 financial products, allowing banks to customise their offering within FX (spot, forwards and options), Stocks, CFDs, Commodities, Futures, Contract Options and Single Stock Options
• Flexibility and control to distribute liquidity from all asset classes with pricing tailored to defined customer (sub)-segments and markets
• The possibility for large counterparts to provide their own liquidity/execution and custody in agreed asset classes to end customers via the White Label platform and liquidity model technology
• Effective risk management through automated margin profiles (stop outs) and real time reporting
• Specialised tools for client administration, risk management and real-time/end-of-day reporting
• Dedicated Relationship Management and White Label Service teams across IT, Trading/Markets and back-office working in three time zones
KEY BENEFIT OF THE SAXO WHITE LABEL PROGRAM SAXO BANK
Source: “White Label Cloud-based trading technology for banks and brokers”, Saxo Bank
• Saxo Bank has more than a decade of experience in White Label Partnerships
• In 2013, Saxo Bank established 10 new white label partnerships
• Most of them with large financial and banking groups - including Standard Bank, Africa’s largest bank
• White label solution for highly standardised products
• Won the “Sell Side Technology Award 2014”
CLIENTS
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Capital Access Network (CAN) Outsourcing small business lending platform to banks in US & Latin America
49
CAN BUSINESS PROPOSITION TO BANKS KEY INSIGHTS
Source: secondary research
• CAN constitutes the largest, non-bank alternative capital provider to small businesses in the US
• The company uses its own real-time platform and risk scoring models to provide capital to small and medium-sized businesses in the US and Latin America and has funded over $2 billion in capital to SMB’s under the brands New Logic Business Loans and Advance Me
• Advance Me: makes merchant cash advances tied to future credit-card sales
• New Logic Business Loans: offers financing to businesses based on Capital Access's own risk-scoring models.
• CAN uses a variety of data points to deem a business worthy of credit or capital apart from the traditional criteria
• Proprietary underwriting algorithms churns through its vast data stacks of historical merchant demographic, firmographic, psychographic and social and behavioral profiles seeking and seasoning new behavioral and synthetic risk indicators and recombining those indicators into new risk scorecards
• Typically will give merchants and businesses anywhere from $2,500 to $250,000 in working capital
• Customers range from medical practices, to shoe stores to auto repair shops to clothing, accessory and home product online retailers
• CAN gives banks a similar ability through a newly launched daily remittance platform. Existing clients are:
Ø AvanzaMe Dominicana Ø “Major" bank in the United States (name not disclosed)
“What Capital Access has come up with is a new way to analyze small-business credit. Instead of waiting 30, 60, 90 days after a quarter is over to get the financial statements, they can get data daily and get into the heartbeat of a business to figure out how it's doing”
Robert Seiwert, American bank Association Vice President
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: First Data Offers electronic commerce and payment solutions
50
TYPICAL CARD TRANSACTION FLOW STRUCTURE FIRST DATA
Source: Capgemini Analysis, 2012; www.yahoofinance.com, August, 2012
• First Data Corporation is a global payment processing company headquartered in Atlanta, Georgia, United States
• Product portfolio includes merchant transaction processing services; credit, debit, private-label, gift, payroll and other prepaid card offerings; fraud protection and authentication solutions, credit reporting agency services (through First Data Merchant Services Corporation); electronic check acceptance services through TeleCheck; as well as Internet commerce and mobile payment solutions
• Developing with card issuers a new technology, called tokenization, that replaces cardholder information such as account numbers and expiration dates with a unique series of numbers that validates the customer’s identity
• Creating software for merchants so that they can accept payments on the new phones
• Providing the backbone of the Apple Pay system
“Our overriding purpose is to help clients grow their businesses, and a key driver of that is through technology allowing card issuers and merchants, large and small, to bring new payment options to their customers, including revolutionary trends in mobile payments”
Frank Bisignano, chief executive of First Data
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Genpact Major business process outsourcing specialist
KEY INSIGHS BUSINESS PROPOSITION
Source: secondary research
• Multinational business process outsourcing and information technology provider
• Formerly GE business unit, spun off in 2005, renamed GenPact
• 73 delivery centres around the World
• Specialised in Financial Services
• Usually provides services to outsource the following areas:
ü workforce administration
ü payroll functions
ü benefits administration
ü technology systems to manage and analyse employee data
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Fundtech Leading provider of financial technology to banks and corporations
PRODUCTS OVERVIEW BUSINESS PROPOSITION
Source: secondary research
• Leading provider of financial technology to banks and corporations of all sizes in the Americas, EMEA, and Asia-Pacific
• It was founded in 1993 and was publicly traded on NASDAQ until November 2011, when GTCR, a Chicago based leading private equity firm, acquired the company merging it with Bankserv (a former competitor)
• Develops transaction banking solutions that it offers as either a software license or Software as a Service (SaaS)
• Major product lines are: payments and liquidity management; cash management, financial messaging through the world’s largest SWIFT service bureau, financial supply chain including: electronic invoice presentment and trade services; remote deposit capture; merchant services such as credit card gateways; and mobile banking
• Thousands of financial institutions and companies around the world rely on Fundtech to improve operational efficiency, increase revenues, and to provide greater competitiveness through business-to-business services
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Macquarie Bank Badged platform creates white labelled solutions for planners and wealth managers
53
• Offers a range of wrap solutions that adviser groups or wealth managers (e.g. ING Australia) can white label to avoid the expense of building or importing their own platform
• Each solution offers different reporting, access, portability and investment options tailored to type of investor
- Macquarie Wrap Manager caters for larger clients with range of 300+ managed funds, direct equities and margin lending
- Macquarie Wrap Accumulators specifically designed for smaller clients with 100 managed funds
- Macquarie SuperOptions offers further reduced services for small low touch clients with 30 managed funds
- Life insurance offered across all platforms within super - Full custodial service enabling seamless transfer between platforms
without capital gains implications
• Advisers can dial their remuneration up and down (establishment fee, monthly fee, transaction fee) depending on client relationship for all three solutions
• It also has a reputation for service excellence - Rapid response: 80% of the 11k calls received each month are answered
within 20 secs - Highly proactive Contact Centre identifying and solving failed redemptions,
trades or cheques - Strategic business manager and training relationship managers offer
tailored advice to advisers - Technical services team provide expert tax, super and social security
advice
• Macquarie has also benefited from the halo effect from its Cash Management Trust which forms the cash hub of many of the leading market platforms
MACQUARIE WRAP SOLUTION RANGE KEY INSIGHTS
MACQUARIE WRAP FUA GROWTH
02468101214161820
May-02 May-03 May-04 May-05
Source: Macquarie Bank website
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: OnDeck One of the fastest growing provider of non-bank business loans
54
ONDECK BUSINESS PROPOSITION PRODUCT OFFERING
Source: secondary research
• Launched in 2007, OnDeck uses data aggregation and electronic payment technology to evaluate the financial health of small and medium sized businesses and efficiently deliver capital to a market underserved by banks
• Through the OnDeck platform, millions of small businesses can obtain affordable loans with a fraction of the time and effort that it takes through traditional channels
• OnDeck proprietary credit model looks deeper into the health of businesses, focusing on overall business performance, rather than the owner's personal credit history
• The OnDeck system also provides a critically needed mechanism for financial institutions and other business service providers to efficiently reach the Main Street small business market
• OnDeck has deployed more than $1 billion in capital to tens of thousands of businesses across approximately 700 different industries
• The company grew 150% in 2013, and was recently named #11 on Forbes' 100 Most Promising Companies in America list and was listed on the Inc. 500/5000 for a second year in a row
• Earned an A+ rating with the Better Business Bureau • OnDeck is financed by some of the nation's leading venture capital firms, including Google
Ventures, SAP Ventures, RRE Ventures, Institutional Venture Partners and Tiger Global
PARTNERS
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Bendigo Bank Bendigo Bank provides an end to end solution for Community Banks
55
• Bendigo Bank is an Australian financial institution, operating primarily in retail banking; has over 400 branches
• The bank's national headquarters is in the city of Bendigo, and it has regional headquarters in Melbourne Docklands, Ipswich, Queensland and Adelaide, South Australia
BENDIGO COMMUNITY BANK INITIATIVE BENDIGO BANK
Source: secondary research
• Community Bank is an innovative franchise program in which the local community owns and operates a Bendigo Bank branch (which is separately incorporated) and Bendigo Bank (BB) provides all the banking infrastructure and support
• BB provides the coverage of its banking licence, a full range of banking products, training of staff and ongoing support
• BB and the community company are each entitled to agreed portions of the revenue of the local Community Bank® branch and the local company is responsible for paying branch running costs
• When the local company begins to make a regular operating surplus, after the payment of branch running costs, and BB’s share of the revenue is received, the remaining funds are available to be reinvested back into the community through dividends to shareholders and grants to community groups and projects
• More than 305 Community Bank branches right across Australia from Alice Springs in the Northern Territory, Augusta in the West and Dover in Tasmania
• The program was a response to the massive closure of bank branches in rural areas. BB has since extended the program to areas that have bank service
• The essence of the Community Bank concept is in sharing the responsibilities and rewards between the community and BB
• Communities across Australia have accepted the responsibility of providing start-up capital and making their branches successful - and are increasingly reaping rewards that aren't just limited to banking
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Copal Amba Provides custom research services (information, analysis, insight) to the financial and corporate sectors
56
• Market and quality leader in the research and analytics offshoring space
• Moody’s acquired Copal Partners in 2011 and Amba Research in 2013, creating Copal Amba
• Provides custom research services (information, analysis, insight) to the financial and corporate sectors
• Supports more than 200 institutional clients through a team of 2,600 analysts – hedge funds are the majority of the clients
• Nine delivery centres are located in proximity to scalable talent pools
• Clients have saved more than $1.5 billion over the past 11 years by using dedicated near and offshore Copal Amba teams, who take on large portions of research and analytical activities
• Offers services in 9 different categories Ø Investment Banking
Ø Investment Research
Ø Quantitative Services
Ø Market Research
Ø Commercial Lending Ø Analytics
Ø Strategy Services
Ø Business Support
Ø Training Services
COPAL AMBA ADVANTAGE KEY INSIGHTS
Source: secondary research
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Citibank Australia Offers white label capabilities that have enabled growth via co-issuance partnerships
57
Growth via partnerships • Without a significant branch footprint and in order to reach segments not traditionally
aligned to Citi’s brand position, Citi Australia has relied on a white label partnership model to drive growth across its cards portfolio. Partners now represent 1/3 of Citi’s 1 Million card base.
• Citi offers an end-to-end white label solution for its suite of credit card partners, including product issuance, risk and balance sheet management.
• Other cards providers offering white label issuance include Macquarie Bank and GE Money
White label cards business • End-to-end operations and servicing is
outsourced to Citibank, who has developed large scalable infrastructure for managing partner portfolios
• Partners institution remain responsible for new account acquisition –
• Cards white-label partnerships typically operate under upfront commission and revenue share model
Source: internal analysis, secondary research
BUSINESS MODEL INSOURCE CAPABILITIES
Underwriting, risk and balance sheet Citi
Admin Support / Back end Citi
Servicing Citi
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Providers: Avaloq International leader in integrated and comprehensive solutions for wealth management, universal and retail banks
58
• Offers ITO and BPO solutions • Launched its BPO offering in September 2011 • Reputation for the highest standards in engineering
excellence
• Invests more in R&D than any other provider for the financial industry
• Unique 100% success rate in its implementation of banking solutions
• Avaloq Banking Suite is consistently designed throughout and delivers strong technical performance
• Only independent provider for the financial industry to both develop and operate its own software
• Business process and IT outsourcing solutions are offered from Avaloq’s BPO centres in Switzerland and Germany
• Employs more than 1,400 banking and IT specialists and has a global customer base of more than 100 financial institutions in over 20 countries worldwide, including tier one banks
• Headquartered in Switzerland, Avaloq has branches in Berlin, Frankfurt, Geneva, Hong Kong, Leipzig, London, Luxembourg, Paris, Singapore, Sydney and Zurich
• Development centres in Zurich and Edinburgh as well as a development support centre in Manila
• Forged a new strategic partnership with Banque Internationale à Luxembourg (BIL) to become the first BPO provider in the Benelux and the French market
CUSTOMERS AVALOQ
Source: secondary research
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Users: major European bank Generating technology impact for a major European bank (Genpact client)
CHALLENGE IMPACT
Develop an efficient processing solution for a new business model • Major European bank moving away from high-risk, high-
margin business activities toward lower- risk/lower-margin ones
• Needed to focus on per-transaction costs in order to reduce fixed costs in its post-trade operations and technology environment.
• Bank sought to consolidate to a shared platform and process framework through implementation of a single, efficient multi- asset trade processing solution to accommodate the new business model
Source: “http://www.genpact.com/docs/resource-/generating-technology-impact-for-a-major-european-bank”
SOLUTION
Managed services delivery from a ‘virtual captive’ center • Transformation was initiated as a large, traditional
technology implementation with a limited scope, to gain cost-effectiveness, speed and flexibility
• Scope expanded to process all back- office asset classes on the new shared platform in a managed services mode from a “virtual captive” center, achieving unprecedented economies of scale.
• Back-office platform configured to process multiple asset classes, irrespective of front-office systems used
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Users: major North America retail bank Generating operational impact for a large North American retail bank (Genpact client)
CHALLENGE IMPACT
Strengthen global operations and drive process improvement • A large North American retail bank was facing an
increasingly competitive market as well as escalating costs resulting from changes in its business model and the regulatory landscape
• Challenges: maintaining operational excellence, improving the customer experience, enacting better organizational controls, and mitigating regulatory risk
Source: “http://www.genpact.com/docs/resource-/generating-operational-impact-for-a-large-north-american-retail-bank”
SOLUTION
A globally distributed ‘virtual captive’ model • Through a collaborative planning process, all business
units were engaged and common goals identified
• Decided to employ a “virtual captive” operating model covering all functions and business lines
• Created operational excellence framework utilizing Lean Six Sigma management practices— one of the first transformations of its kind and scale in the banking industry
• A multi-location model spanned the Americas (transformation, re-engineering and IT), India (transactions processing and technology), and the Philippines (voice operations) along with onsite re-engineering support
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Users: DAWN An example of how outsourcer are dis-intermediating banks connection with corporate customers
61
• South Africa’s Distribution and Warehousing Network (DAWN), is a major manufacturer and distributor of hardware, sanitary ware and engineering products
• The group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals
• DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology
OUTSOURCING TO TREASURY ONE KEY INSIGHTS
Source: secondary research
• DAWN selected TreasuryOne to support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management
• TreasuryOne performs mainly three different tasks: Basic Treasury Operations
• Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team
• DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations
• Centralised all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows
Technology Support • DAWN has 100% real time visibility of its treasury processes, positions and exposures through direct access to
the supporting technology system
• Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management
Strategic Treasury Development • Controlled process to review and close bank accounts • Team able to net the flows moving through bank accounts at appropriate levels for approval, thereby reducing
fees by reducing the number of physical flows and aligning the account structure with improving cash forecasts
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Users: Lending Club Lending Club and Union Bank Enter Into Strategic Alliance
62
• Lending Club is an online leading credit market place, and the average loan amount is $14,000
• Utilises technology and innovation to reduce costs and offer borrowers better rates and investors better returns
• More than half of Lending Club's funding comes from individuals, although some is coming through brokers and wealth advisers
• Since facilitating its first loan in May 2007, Lending Club has more than doubled annual loan volume each year
• By using technology and automating processes online, Lending Club matches creditworthy borrowers with investors looking for yield
• Borrowers benefit from rates generally lower than credit cards, and the platform’s investors have enjoyed solid returns
• As of March 31, 2014, more than $4 billion in personal loans have been originated through the Lending Club platform, helping more than 290,000 consumers to achieve their financial goals.
• In March 2014, Lending Club launched a small business loan platform to help small-business owners access affordable credit
• The Company has been prominently recognized as a leader for its growth and innovation, including being named one of Forbes’ America’s Most Promising Companies three years in a row, a 2012 World Economic Forum Technology Pioneer, and one of The World’s 10 Most Innovative Companies in Finance by Fast Company in 2013
LENDING CLUB AND UNION BANK LENDING CLUB
Source: secondary research
• Union Bank will purchase personal loans through the Lending Club platform, and the two companies will work together to create new credit products to be made available to both companies’ customer base
• Union Bank is one of the largest 20 USA banks
• This strategic relationship brings together Lending Club’s low operating cost and Union Bank’s strong balance sheet and large customer base
• Lending Club has previously struck deals with 10 other banks to buy its loans, but Union Bank is by far the biggest
Case Study: DAWN Integrates Outsourcing Services into Treasury OperationsHanre Bester, DAWN - 7 May 2014South Africa’s Distribution and Warehousing Network, aka DAWN, is a major manufacturer and distributor of hardware, sanitary ware and engineering products. This case study describes how the group used a cost-effective, low-risk strategy for outsourcing elements of its treasury operations to support the growing demands of its core business and strategic goals. DAWN uses its outsourcing partner’s professional resources and expertise in a broad range of front and back office activities, and for hosting underlying technology.How useful was this article?(5=high) Average 4 out of 5ShareShare on emailShare on printShare on linkedinShare on twitterShare on facebookShare on googleMore Sharing ServicesThe growth of DAWN’s domestic and international business has inevitably increased the scale and complexity of the group’s financial risk exposures. The business imports raw materials and finished goods, and has been growing its exports to several countries. Strategically, DAWN recognised the value of developing a treasury operation to deliver best practice results in cash, foreign exchange (FX) and debt management and also to provide a secure platform for future growth. South Africa has only a limited pool of qualified corporate treasury executives, so DAWN’s finance management team decided to evaluate a possible outsourcing solution to support its corporate evolution. Outsourcing is a common business practice in South Africa. In finance and treasury, it offers a solution for FX risk management by providing strategy design, advisory services and market execution. FX is a significant requirement for DAWN, but as the finance team’s experience and understanding grew, members determined that there is much more to treasury than FX. The group decided to seek an outsourcing partner who could support its objective to build a high-quality treasury operation that protected financial assets and earnings, managed its cash effectively, helped to rationalise bank relationships and enabled DAWN to progress from basic cash management into more effective working capital management - in turn leading to asset and liability management for the whole enterprise and ultimately the establishment of an internal bank. The finance team selected Pretoria-based TreasuryOne as outsourcing partner, having determined that it was best-placed to deliver the width and quality of treasury services to support DAWN’s needs and vision. The professional relationship with TreasuryOne is outlined below in three sections: basic treasury operations, technology support and strategic treasury development. Basic Treasury OperationsDAWN’s finance team and TreasuryOne work closely together, so that outsourced treasury activities are closely integrated with DAWN’s core operations. DAWN developed a treasury policy document over four years; with TreasuryOne’s assistance, the policy has now been implemented and provides the framework for all daily treasury operations. Required hedges are planned by both parties and then executed in the markets by TreasuryOne’s dealing team, who seek the best available rates. DAWN uses outsourcing for front and back office operations, which includes the transaction settlement process as well as issuance and management of confirmations. The team has further advanced this process to centralise all foreign payments and inflows within treasury, which also facilitates the compliance and regulatory requirements governing foreign payments and inflows.The process integrates the use of SWIFT to retrieve and download daily statements for all relevant domestic bank accounts and DAWN is now rolling out the platform for its international businesses. Outsourcing has enabled the team to take advantage of SWIFT’s robust and secure bank messaging facilities. The solution also uses SWIFT-based confirmation matching services, to provide a high level of control in the construction of DAWN’s daily cash position, and for general treasury operations. Automated use of SWIFT’s MT940 message format has accelerated the process, and eliminated error-prone manual efforts. A key part of the back office process involves reconciling the downloaded bank account information against transactions anticipated in the cash book. The process is also automated and rules-based, and allows the back office to identify, research and correct any differences between the bank’s records and DAWN’s. Reconciliation optimises treasury control, providing a sound basis for accurate cash positioning and for planning the day’s dealing. The cash forecasting solution adopted for liquidity management involves DAWN subsidiaries submitting their projected cash needs and surpluses to central treasury over the web. The intercompany relationship between the subsidiaries and DAWN and its treasury as internal banker is augmented by implementation of various intercompany loan transactions, i.e. long term loans, bridging finance loans and current accounts with the supporting legal agreements’ terms and conditions.Technology SupportDAWN’s executives enjoy 100% real time visibility of its treasury processes, positions and exposures through direct access to the supporting technology system - a critical factor. Outsourcing fees encompass all related technology costs, including hardware, maintenance, database management, back-up and recovery and upgrade management. Consequently, executives need not be concerned with day-to-day system operations, and can concentrate on finance management. Importantly, the system is securely hosted by Exordia. System access is web-based and available 24/7, allowing the finance team to manage and monitor according to its needs, and request reports as required. The system complies with high audit standards, in security, segregation of duties and lock-down of automated treasury processes. The audit trail captures each database change: the record for every event defines the change; identifies the specific individual responsible; and records the date and time of the action. Strategic Treasury DevelopmentAs the business relationship with DAWN’s outsourcing partner has evolved, the team has been able to focus on the more strategic issues of its longer-term treasury vision. Key to achieving this has been a semi-permanent senior treasury professional from TreasuryOne, with executive experience at several major South African banks and corporates, joining the team. She has added value in bank negotiations and the design and delivery of treasury strategy. She works as a team member, offering the group more than an outside consultant could. This involves, for example, expert understanding of DAWN’s position as a certain type of client for a specific bank, which is very valuable in negotiating the appropriate pricing arrangements for delivering different banking services. As much as the transactional relationship is valued between DAWN and its banker, treasury follows a ‘best product and best price’ approach in securing the most efficient financial product from the banking community.The outsourcing partner performs a range of operations, and is responsible for delivering high-quality results. Additionally, they can provide the team with other kinds of expertise, training and consulting as and when needed. DAWN’s operations are being streamlined and optimised, with the team looking to achieve further savings and efficiencies by closing more bank accounts, reducing the number from around 60 to 30-40. There is a controlled process to review and close bank accounts and the team is able to net the flows moving through bank accounts at appropriate levels for approval, thereby also reducing fees by reducing the number of physical flows and also aligning the account structure with improving cash forecasts.Overall, the group’s treasury positions are now easier to understand and the team can act on them effectively. Members have a clear view of the evolving cash position, and consider cash to be the primary health indicator for the business. They can interrogate the business model and navigate the way forward to the group’s longer-term objectives, including the establishment of an internal bank to provide treasury services across the business. DAWN is transitioning from basic cash management into longer-term working capital management, and from there to full asset and liability management for the entire enterprise. In this way, treasury can maximise the value it contributes to the group; and this is being achieved effectively as a direct result of the way outsourcing of some treasury operations and functions is used to complement in-house activities. DAWN’s Standard & Poor’s (S&P) credit rating has improved to A- long term and A2 short term as it has been able to negotiate effectively and professionally to improve and restructure financing both for working capital and longer term capital expenditure, to support the group’s expansion. The management team is working on increasing use of the capital markets, through commercial paper and medium term note (MTN) issuance, and possibly also using private placements. DAWN is seeking to optimise financing through a combination of bank facilities and capital markets debt, and to reduce funding risk by diversifying its investor base. ConclusionOutsourcing as described has proved to be highly beneficial for DAWN, which now enjoys cost-effective and sophisticated front and back office treasury operations, supported by powerful technology, and backed-up by the high quality professional expertise and service width of our outsourcing partner. A key benefit of this arrangement is that the group has been able to accelerate the practical realisation of its vision for treasury development. Back to top
“"This relationship will allow Union Bank to invest in high quality assets while bringing new products to our customers”
"Lending Club delivers an excellent customer experience and has established a reputation for innovation. We are excited to work with this innovative organization”
James Francis, Union Bank, VP Consumer Lending
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Users: Moven A financial control app linked to a debit card account
63
How does it work • Launched in February 2013, raised $2.4M in funding
• Founded by Brett King – financial educator and book writer
• Tracks spending analysis across all your bank and credit accounts • Records individual transactions, monthly totals by category and how that compares
with an individual’s typical spending
• Pay friends with Facebook, email and mobile
• Direct deposit and transfer money from external accounts
• Provide Moven MasterCard debit card and mobile payment sticker
• Real time updates and Alerts
BUSINESS MODEL
Most of the function are outsourced • Offer connection to $40,000 ATM, all managed
by external partners • Branchless
• Payment services outsourced to a third party • Minimized customer interaction thanks to a
mobile app
Source: internal analysis, secondary research
OUTSOURCED FUNCTIONS
Debit Card/ PayPass Sticker Issuer CBW Bank
Bank Account Insurance FDIC
Payment Capabilities CBW Bank
Banking and Technology capability Bancorp
© Internal Consulting Group 2015 KAR 015 – Virtualization in Financial Services
COMMERCIAL IN CONFIDENCE
Users: Mpesa M-Pesa is the financial arm of Safaricom, an African Telco Player
64 Source: “Overview of Successful Mobile Banking Initiatives from Around the World”, Amarante Consulting 2013
BUSINESS MODEL OUTSOURCED FUNCTIONS
M-Pesa has progressively introduced a whole range of banking products • M-Pesa customers can deposit and withdraw money from a network of agents that
includes airtime resellers and retail outlets acting as banking agents
• Operated by Safaricom, a Telco player which is not classed as a deposit-taking institution
• Currently most advanced payment system in the World
Saving and Credit (M-Shwari) CBA
Micro Finance (M-Kesho) Equity Bank
Technology Management IBM
International Money Transfer Western Union
M-Pesa is a virtual player that leverages • Branchless banking system
• Every function of the company is outsourced, except Marketing and Sales (where it leverages its Telco know how)
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Users: Tigo Ghanaian mobile phone operator providing life insurance to its clients
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How does it work • Launched in Ghana in 2011 by Tigo, a Telco player, serving one million people
• Successively launched in Tanzania and Senegal in 2012
• Based on the subscriber’s monthly airtime usage • Tigo Family Care Insurance provides life insurance coverage of up to GHS 1,000 (US
$ 520) for the Tigo subscriber and one additional family member
• More than 300 claims have been paid to date through the Tigo Cash service, which provides easy and safe money transfer throughout Ghana, Tanzania and Senegal
• Recently launched a new promotion, ‘Xtra Life’, which allows a subscriber to double the free life insurance cover by paying 5 Gp (US$ 0.03) per day via mobile airtime; with this added innovation Tigo subscribers can enjoy up to GHS 2,000 (USD$ 1,040)
Most of the function are outsourced • Tigo is just leveraging its customer base,
every other function is outsourced • Administration and Underwriting services are
completely outsourced to a “Best in Class” third party
• Sign-up leverages any Tigo service Centre around the country
• Planning to make a wide range of affordable and reliable insurance services available to the mass market
Source: internal analysis, secondary research
BUSINESS MODEL OUTSOURCED FUNCTIONS
Underwriting Vanguard Life
Admin Support
Bima MicroEnsure
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Users: Portfolio Partners Switching from different outsourcing suppliers to a single one
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• PPL is a Melbourne- based manager of unit trusts and is owned by the UK’s Morley Fund Management, the asset management arm of Aviva plc.
• Portfolio Partners has been outsourcing several of its back and middle office functions since 1996 in a contract signed with RBC Dexia to cover unit pricing, tax and regulatory reporting and trade matching
• At the same time, the statutory funds operated by Aviva Australia have been administered by JP Morgan through an historic relationship with Bankers Trust
• PPL is in the process of shifting its outsourcing account to JPMorgan only
“Switching to a single provider of back and middle office services will streamline our process and cut down communication time.”
“By outsourcing our back office and some of our middle office functions,
we have been able to redirect energy and spend to areas which help us to generate investment performance – in other words, areas of core focus”
Tony Burrill, director of operations at PPL
Source: “A Guide to Custody and Outsourcing in Asia”, Asian Investors
BUSINESS MODEL OUTSOURCED FUNCTIONS
Custody JP Morgan
Statutory Accounting JP Morgan
Unit Pricing JP Morgan
Trade Matching JP Morgan
Fund Accounting JP Morgan
Tax Reporting JP Morgan
Trade Reporting JP Morgan
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Users: Deutsche Asset Management Australia (DeAM) Easing the transition to an outsourcing supplier by reallocating the employee to the outsourcing partner premises
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• DeAM appointed State Street as the provider of DeAM’s middle and back office administration services in September 2003
• State Street provides a set of services for A$16 billion of DeAM Australian assets under management for their local unit trust and segregated mandate business
• To achieve the most efficient back and middle office model, State Street recommended a “lift out” of DeAM’s processes to create a single operating model within State Street
• Involved Deutsche’s middle office staff being employed by State Street to continue to operate the existing systems while remaining within the fund manager’s premises – the idea being that this would minimize disruption to DeAM’s front office staff and clients
• State Street migrated to its internally developed middle office systems, procedures and premises in 12 months
• The aim of the deal is to give the Australian division of DeAM access to State Street’s global outsourcing model while providing some consistency and ability to integrate with other DeAM/State Street outsourcing arrangements from around the world
Source: “A Guide to Custody and Outsourcing in Asia”, Asian Investors
BUSINESS MODEL OUTSOURCED FUNCTIONS
Custody State Street Fund Administration State Street Unit Pricing State Street Regulatory Reporting State Street Custodian Reconciliation State Street
Performance Reporting State Street
Fund Accounting State Street
Tax Reporting State Street
Unit Registry State Street
Trade Matching and Routing State Street
Corporate Action Processing State Street
Accounting State Street
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Users: Tesco Bank Offers insurance product leveraging white labels providers
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Tesco Bank is a retail bank in the United Kingdom which was formed in 1997, as part of a 50:50 joint venture between the Royal Bank of Scotland and Tesco, the UK's largest supermarket • Tesco later acquired the RBS shareholding, which resulted in the bank becoming a
wholly owned subsidiary
• The bank offers a range of insurance, credit cards, loans, savings, mortgages and travel products
• A unique selling point of Tesco's banking products is that the bank is able to leverage its large customer base to cross-sell financial services products, as customers can accumulate Tesco Club card points when they purchase finance products
• As of September 2013, the bank has around 6.5 million customer accounts and policies
• For insurance products underwriting and administration, they use different suppliers: - Car Insurance: different provider - Home Insurance: different providers - Pet Insurance: Royal and Sun Insurance - Life Insurance: Aviva
Source: internal analysis, secondary research
BUSINESS MODEL OUTSOURCED FUNCTIONS
Underwriting White label supplier (Depending from the product)
Admin Support / Back end
White label supplier (Depending from the product)
Payment Capabilities White label supplier (Depending from the product)
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Users: BBVA BBVA Compass teams with OnDeck to bolster bank's small business offerings
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• BBVA Compass is a subsidiary of BBVA • BBVA is a customer-centric global financial
services group founded in 1857 • The Group has a solid position in Spain, is the
largest financial institution in Mexico and has leading franchises in South America and the Sunbelt region of the United States
• Its diversified business is geared toward high-growth markets and relies on technology as a key sustainable competitive advantage
• BBVA Compass is a Sunbelt-based financial institution that operates 684 branches, including 352 in Texas, 89 in Alabama, 78 in Arizona, 62 in California, 45 in Florida, 38 in Colorado and 20 in New Mexico
• BBVA Compass ranks among the top 25 largest U.S. commercial banks based on deposit market share
• BBVA Compass has been recognized as one of the leading small business lenders by the Small Business Administration and was recently awarded the 2013 Celent Model Bank Award for its new core banking platform
BBVA AND ONDECK PARTNERSHIP ADVANTAGES BBVA COMPASS
Source: secondary research
• Under the agreement, BBVA Compass will market OnDeck loans to its small business banking customers
• Quicker loans delivery to SME • The OnDeck Score(TM) analyzes thousands of data points -- from cash flow to public
records to social data -- to assess the health of a small business
• BBVA will use the OnDeck Score and exclusive technology to provide qualifying business clients with loans up to $250,000, six- to 24-month payment terms, and funding in as fast as one business day
• OnDeck will make the loans and collect repayments
• Banks don’t make a lot of money on relatively small loans: underwriting a $50,000 loan takes a similar amount of work as underwriting a $5 million loan and is far less profitable
• OnDeck’s loans are easier to get than bank credit. • There’s an online application process, and the company promises short-term loans of
as much as $250,000 that can be approved within minutes
• The loans are also more expensive, with effective interest rates that can be multiples of what bank loans cost
• OnDeck proprietary credit model looks deeper into the health of businesses, focusing on overall business performance, rather than the owner's personal credit history
PARTNERSHIP REASONS
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Users: Business Bank of Texas (BBT) Outsourced E2E banking platform and no teller counters
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• Online Commercial Banking • Remote Deposit
• Receivables Management
• Payables Management
• Commercial Lending
• Certificate of Deposit Rates
BBT BBT PRODUCT OFFERING
Source: secondary research
• Specialised bank focusing exclusively on banking services for business • Other than traditional banking services, the bank provides commercial
lending options, cash management, and concierge services • Online, remote banking business model to keep overhead, service rates,
and fees low while enabling 24/7 online banking and remote deposit capture
• Relationship officers in Austin, San Antonio and Dallas
• BBT uses Precision Computer Systems' (PCS) Vision end-to-end core banking platform, opting for an outsourced implementation
• Good fit within the bank's commitment to keeping overhead as low as possible
• While banking regulations permit 50 % of capital to be in nonearning assets, BBT has just 5 % of its capital in nonearning assets
• More than 95 % of the bank's deposits are received via RDC
• Business customers run checks through a tabletop MICR reader/scanner at their own locations, producing check images
• The check images are submitted through a Web-based application and processed through PCS IT systems “Our customers [serve as] our branches. We don't have a teller
counter” We don't own anything”
Ed Lette, CEO and Chairman, BBT
“The savings is so sognificant with BBT that it’s enough to pay for a staff member”
John Eagle, VP Controller, AMBA
“When we apply for a loan or a line of credit we have an answer within days instead of weeks”
Mark Marlow, MKC
QUOTES
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Virtualization in Financial Services - Content
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Section Component Description
1 Critical Frameworks • What do we mean by Virtualization? • Drivers of virtualization • The decision to virtualise
2 Key Case Studies • Selection of Best Practices cases around the globe
3 Key Articles • Key published articles
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Source Data Title
Accenture 2014 White Labeling: “White Hot” Opportunity for Payments Players
International Journal of Advances in Computer Science and Technology
2014 A single sign-on based integrated model for e-banking services through cloud computing
Callidus Cloud 2014 Key Bank and Callidus Cloud Team to Provide Operational Excellence
Dukascopy 2014 Welcome to Dukascopy Bank
EY 2014 Banking on Technology: Perspectives on the Indian Banking Industry
EY 2014 Business banking: redesigning the front office
Copalamba 2014 Lveraging outsourcing in credit functions: stay competitive in a complex business environment
Saxo Bank 2014 White Label: cloud-based trading technology for banks and brokers
Trestle Group Consulting 2014 BPO in Swiss Banking: current situation and prospects
Novantas Review 2014 Customer Analytics: unlocking growth
Banking.com 2014 Outsourcing and retail banking: digital innovation and the future
Oliver Wyman 2013 Celent model bank 2013: Case studies of effective use of technology in banking
IBM 2013 Cloud computing for banking
Accenture 2013 Commercial banking: Where are you placing your bets?
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Relevant Articles and Additional Knowledge References
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Source Data Title
Redhat 2013 inG-di Ba future proofs, migrates from solaris to Redhat enterprise linux
Banking.com 2013 Innovation: both homegrown and outsourced
Lendkey 2013 The New Software-as-a-Service Era
Firstdata 2013 Outsourcing for Innovation
Tata Consultancy Services 2013 Agility in Financial Services: White labeling to Improve Time-to-Market for New Products
Capgemini 2013 Should Card Issuers Outsource or Process In-House?
Garph 2013 Virtual banking by commercial banks and customer satisfaction in zimbabwe
Banking Tech 2013 Celent study says banks should put outsourced payment infrastructures into the cloud
PWC 2012  Time for an upgrade: five things you need to know to make your commercial lending transformation a success
Capgemini 2012 Global Trends in the Payment Card Industry 2012: Acquirers
Capgemini 2012 Challenges & Opportunities for Merchant Acquirers
Accenture 2011 Next generation SME banking
Citigroup 2011 Australian Banks: saying hooroo to the outsourcing guru
Temenos 2011 Case Study Metro Bank
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Relevant Articles and Additional Knowledge References
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Source Data Title
Seven Seas 2011 Outsourcing the cloud
Platform Computing 2009 Research Report on Virtualization and Cloud Computing in Test/Dev Environments
Accenture 2009 Achieving high performance through tailored outsourcing solutions from Custom BPO Services
De Nederlandsche Bank 2007 Size matters: economies of scale in European payments processing
Celent 2006 Virtual Vaults: They're Not Just for Cash Anymore
KPMG 2008 Knowledge Process Outsourcing: unlocking top-line growth by outsourcing “the core”
Asian Investor 2004 A Guide to custody and outsourcing in Asia
Bank Systems and Technologies 2003 Net Bank’s new niche: small business
Bank Marketing 2000 Big banks, big bytes
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Relevant Articles and Additional Knowledge References
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