Author: Ronak D

IT Talent – Winning the Short-term Battle and the Long-term War | Blog

With the cost to secure IT talent internally and through third-party providers only continuing to rise, attracting and retaining technology workforce will require immediate and long-term tactics. Participate in our study to identify best-in-class IT workforce development strategies in leading global organizations.

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July Quick Poll | How Recruiting, Hiring, and Retaining IT Talent Changed in Q2 2021

The cost of hiring top-tier IT talent is escalating by the day. The persistent skills shortage has been exasperated by increasing post-COVID digital transformation spend and pent-up business demand, creating an intense short-term talent scramble.

Despite enterprises using known offensive (attraction) and defensive (retention) tricks, a demand-supply gap of 15%+ for critical roles in cloud, data, automation, agile, and security is being seen across regions. Offering compensation corrections and counters, bonuses, flexible location options, or job rotations are keeping companies in the race, but more ingenious measures are needed.

July Quick Poll | How Recruiting, Hiring, and Retaining IT Talent Changed in Q2 2021

Insights to win the short-term battle

Enterprises are realizing that classical attraction and retention strategies are being relegated to “common differentiators.” Many enterprises are starting to max out on the stretched end of their annual IT workforce budgets – even as attrition levels spike beyond 30 percent for key roles.

We see this scramble persisting over the next 3-6 months. However, as pointed out by our CEO Peter Bendor-Samuel recently, fulfillment of pent-up demand and potentially increased cross-border talent movement is expected to start narrowing the demand-supply gap from the current dizzying levels as we enter 2022.

IT Talent War

 

Here are a few novel approaches enterprises can take to alleviate workforce challenges to a certain extent, especially around access and time-to-hire:

  • Relax shortlisting criteria: Recalibrate technical competency thresholds (e.g., the stringency of HackerRack test ratings and additional technical rounds), within reasonable limits, to broaden the talent funnel in the short term. Consider increased training at the start and onboarding graduates with dedicated training investments
  • Involve business and operations: Follow the lead of best-in-class enterprises by having:
    • IT engineers, product managers, and agile coaches – actively recruit and scout in online communities
    • Senior IT and business leaders – elevate brand value and excite prospective candidates via informal discussions
    • IT teams – screen candidates to cut down shortlisting efforts, especially for critical/complex roles
    • Team members – approach candidates before the on-boarding to build rapport
  • Upskill rapidly: Stagger skilling and training for new employees joining the organization and existing employees switching roles to reduce deployment time (e.g., from 8-9 weeks to 4 weeks)
  • Focus on internal mobility: Re-evaluate internal career progression designs and create better growth opportunities for employees by properly mapping competencies, clearly articulating alternative roles/paths, and incentivizing critical skills development
  • Explore alternative channels: Expand staffing partnerships, leverage hackathons/online competitions, proactively reach out to developer communities (Hacker News, Github, Stack Overflow, and Reddit), and engage with boot camps to improve channel access
  • Hire location-neutral: Hire talent remotely with no requirement of the work location to tap into the broad IT pools and push decisions on Work from Home (WFH) or visas for later. Consider pods, satellites, and Centers of Excellence (CoEs) to access niche skills
  • Increase referral premiums: Jack up referral premiums by 50 to 100 percent, especially for critical positions
  • Award retention bonuses: Offer retention bonuses with a time lag of only a few months to counter immediate attrition

Staying ahead in the long-term talent race

With IT at the front and center of every business, enterprises across industries are inevitably competing for the same target talent pool. With demand expected to outstrip supply, only enterprises that take their tech workforce destinies into their own hands will survive. And the planning and structural interventions required to drive IT talent self-sufficiency need to begin today, if not already.

IT Workforce Strategy and Planning

If you are interested in learning how other organizations are addressing the IT talent shortage, Everest Group is currently conducting an extensive study to identify best-in-class, or Pinnacle, IT workforce development strategies in leading global organizations. Take the survey

We will share a complimentary summary analysis of the survey results highlighting how your organization compares against the peer group with respect to capabilities created and business outcomes achieved.

Please reach out to [email protected], [email protected], and [email protected] to discuss this critical topic.

Also watch Peter Bendor-Samuel’s two-part video series about the ongoing talent war.

Deconstructing the Digital Assets Revolution – What Financial Institutions Can Learn from the Meteoric Rise of Coinbase | Blog

Digital assets have come a long way from only being Bitcoin to a complete array of increasingly used financial assets. Coinbase’s striking rise has demonstrated a growing acceptance for cryptocurrency that could stick with traditional investors. Is the future for digital currency real, and what obstacles do banks and financial institutions face to compete in this growing crypto market? Read on to learn more of our insights on the next-generation currency movement.  

Growing digital asset options

When Coinbase became the first major cryptocurrency start-up to go public on a U.S. stock market this April, the world started giving crypto more legitimacy and the company’s astronomical valuation has garnered great attention.

Along with the skyrocketing value of cryptocurrencies such as Bitcoins and Ethereum, Coinbase – the preferred platform for U.S. investors to purchase these assets – has grown ninefold over the past year. The investment trend over the past five years suggests that cryptocurrency valuation will cross US$24 trillion by 2027.

This rocketing rise can be attributed to increased interest by retail and institutional investors that started investing in Bitcoins and Altcoins as another option to falling interest rates across the world. Other crypto assets such as Non-Fungible Tokens (NFT) traded nine times in the first half of 2021.

Crypto assets have experienced great growth since their early days. Some of the new types (described below in Exhibit 1 and 2) have unique use cases and designs.

Exhibit 1

Picture1 1

Exhibit 2

Picture4

Investors paying attention

Improved technology and better financial services have fueled a remarkable demand in digital assets, especially by institutional investors, over the past 18 months.  Investor groups are getting involved in the market for various reasons, including:

  • Retail investors – improved personal finance management, easier payment and remittance services, and increased transparency offered by Distributed Ledger Technology (DLT) through openly verifiable and immutable transaction history databases
  • Institutional and High Net Worth (HNW) investors – lower operational costs, high reliability and security, faster transaction processing and almost real-time tracing of contracts and payments, and improved access to liquidity for fundraising

Technology firms partnering

As investor interest grows, several FinTechs and BigTechs are investing in technology and infrastructure to support digital assets. Google has partnered with exchange platforms Paxful and Coinbase to add crypto-based transactions on Google Pay. This also allows users to buy Bitcoins and pay using them. Similarly, leading banking software firms such as Temenos recently partnered with specialist digital asset and blockchain infrastructure player Taurus to help banks bridge the gap between traditional and digital assets.

Early access to data will give FinTechs and BigTechs an edge to better understand investor profiles, investment willingness, and funding goals of a large pool of clients. These larger investor groups are also nimble enough to partner with smaller FinTechs and InsurTechs to provide specialty services through a common digital platform.

Opportunities for banks

Since banks would need to cut through bureaucracy, change management challenges, and garner huge financial resources, it is not likely they will develop these technologies quickly enough for the market’s fast pace. However, we believe that increased participation from traditional financial institutions in managing digital assets will pave the way for digital assets in mainstream banking and payments systems as regulations improve.

Large financial institutions such as BNY Mellon recently invested in building a team of technology and business professionals to develop products and platforms that will allow customers to manage cryptocurrency alongside all their other assets. The custodian also received permission from regulatory bodies to offer crypto custodian services in February 2021.

Similarly, Singapore’s DBS Bank received approval earlier this year from the Monetary Authority of Singapore (MAS) to launch the DBS Digital Exchange for tokenized assets. Global banks such as Deutsche Bank are also building services such as institutional-grade hot and cold storage with insured protection for custody services. Huge potential exists to tap into business segments such as wealth management, estate services, financial planning, and asset services in crypto markets since the current penetration is very low.

To stay ahead of the curve, banks should follow this three-pronged strategy to build, partner, and acquire digital assets skillsets in the market:

  • Partner and collaborate: Traditional financial institutions will face several issues in developing
    in-house solutions to adopt new financial technologies, such as updating legacy systems and regularly innovating solutions offered to remain competitive in the market and keep up with global regulations. These institutions can partner with FinTechs specializing in developing and servicing such solutions at a global scale in a plug-and-play model
  • Build and develop: Large financial services firms are developing capabilities and skillsets to stay ahead of the competition in the crypto asset services market. Large Banking and Financial Services (BFS) firms such as Wells Fargo have introduced cryptocurrency funds focused on high net-worth individuals. Similarly, JP Morgan has already tested its stablecoin, JPM Coin, which has been pegged against the U.S. Dollar, and offers a solution to cross-border trade between banks and corporates over blockchain
  • Acquire and invest: Financial institutions can nurture and acquire FinTechs start-ups that are aligned with the future of financial technology. They can also directly acquire solutions already developed in the market to enhance their platforms in serving their customers with the latest technologies

 Exhibit 3

Picture3

Regulatory and other obstacles to overcome

While its potential is promising, banks still face many challenges around regulations, disaster management, private key recovery, insurance-backed custody, and systems for fraud prevention. The biggest roadblock for BFS firms is the lack of clarity of a regulatory framework around digital assets. The process of building a regulatory framework for digital assets will take several years and be iterative. In the interim, policies that are uncertain and not applicable to digital assets should be brought to the notice of regulators and industry bodies as they continuously evaluate policies and provide clarifications.

Banks and financial institutions also will need to make enormous investments in data and technology systems to manage the Risk and Compliance (R&C) around digital assets. Financial institutions will have to adopt a compliance-by-design approach to build platforms to manage the digital assets transactions and the associated mid- and back-office operations. This will require building new data and technology systems for R&C initiatives as no commercially off-the-shelf software in the market has matured enough to manage scaled compliance workflows and operations for digital assets.

For more insights on digital assets adoption, please read our detailed perspective in the report, Deconstructing the Digital Assets Revolution – What Financial Institutions Can Learn from the Meteoric Rise of Coinbase.

If you would like to share your observations or questions on the evolving digital assets landscape, please reach out to [email protected], [email protected], or [email protected].

Choosing the Right Partners in the Expanding Environmental, Social, and Governance (ESG) Product Ecosystem | Blog

The ESG platform/product vendor ecosystem is expanding at an exponential rate, with banks increasingly collaborating with the larger network following the pandemic. Large banks such as Citibank have collaborated with Truvalue Labs to accelerate their ESG research initiatives. Similarly, in the UK, Lloyds Banking Group has partnered with Sancroft to obtain insights and advice on the best ESG practices. US-based specialist asset manager Trillium Asset Management has collaborated with Trucost to conduct a carbon analysis of its sustainable opportunities strategy.

In our previous blog on ESG, we highlighted that – while the ESG ecosystem is evolving within the Banking and Financial Services (BFS) industry – firms fail to recognize its potential to generate long-term risk-adjusted returns. In this blog, we explain the evolution of the ESG product and platform vendor landscape. These products are helping BFS firms think and act on ESG proactively and tap into several opportunities that the ecosystem offers.

Decoding the ESG vendor landscape

In response to the demand for robust ESG integration, vendors are offering various products and services, ranging from raw data and reports across multiple ESG areas to extremely sophisticated analytics platforms. The focus areas for these firms include stock screening, portfolio construction and analysis, competitive benchmarking, risk management, green bond framework evaluation, second party opinions, scenario analysis, controversy analysis, ratings, and rankings.

The ESG vendor landscape itself can be broadly divided into three categories: data and data analytics providers, technology providers, and ESG advisory firms.

Data and data analytics providers use unique ways of sourcing, categorizing, and quantifying ESG data before building an analytics layer over it. Based on coverage, these providers can be further categorized as ESG market data providers, ESG exclusives, and ESG specialists.

  • Global and well-established financial market data providers now offer ESG data as well. Some of them even consider ESG factors when determining financial ratings.
  • ESG exclusives provide comprehensive ESG data solutions covering majority of asset classes. They extract data from multiple public sources and/or company interviews and apply subjective analysis using diverse ESG metrics to create a comprehensive solution.
  • ESG specialists cover specific ESG factors such as gender equality at companies or the company’s impact on climate and the environment.

Consulting and advisory firms assist financial services firms and other enterprises in building data and governance frameworks, integrating ESG, and facilitating their regulatory reporting strategies. In fact, taking note of ESG’s growing importance, firms such as esg.solutions, NEPC, Sancroft, Callan, State Street, Clearbrook, Goby, ASC Advisors, KKS Advisors, Canterbury Consulting, and Mercer have introduced ESG consulting as a separate arm within their consulting practices. We believe that the ability to highlight ESG issues that affect financial performance will be a differentiating factor in this arena.

The exhibit below showcases the vast and expanding ESG vendor landscape today.

Exhibit: Understanding the ESG vendor landscape

ESG Vendor Landscape

With such an expansive and thriving market for ESG services, it may be difficult for leaders to choose the best-fit vendors.

Selecting the right vendors and ecosystem mix will make a difference

Some characteristics that will help financial institutions distinguish among data and analytics vendors are market coverage, quality and quantity of ESG indicators, investments covered, methodology, sources, support to standard frameworks, and company involvement.

Also, market intermediaries such as stock exchanges, rating agencies, reporting and regulatory bodies, index providers, and ETF providers play an equally important role in developing the right ESG ecosystem. Hence, BFSI firms need to collaborate with the right mix of data, regulatory frameworks, and technologies. It is complicated, but ultimately provides a lucrative opportunity to IT service providers to offer innovative ESG products and solutions and provide custom-built solutions on partner products tailored to banks’ specific needs. This will ease the transition and change management process for banks and financial institutions. A few service providers, consulting leaders, and boutique consulting players have already created frameworks and solutions to help banks with their ESG needs.

We are confident that over the next decade, ESG will not be discussed as a standalone or secondary strategy but will be a mainstream financial services proposition, creating sustainable long-term value, not only for investors and BFSI enterprises but for the entire ecosystem.

If you would like to understand how a platform-centric approach can fast-track your ESG journey, reach out to [email protected], [email protected], or  [email protected].

We also invite ESG data and analytics providers, IT service providers, and consulting firms to reach out to us to get featured in our upcoming research assessing ESG vendors that serve BFSI enterprises. Please refer our Research Participation Guide to understand the scope, objectives, and participation process of the research.

This is the second blog in this series that explores the ESG space; read the first and third blogs for further insights.

The Importance of Integrating Environmental, Social, and Governance (ESG) Mandates into BFSI Enterprises’ Operations | Blog

Banking, Financial Services, and Insurance (BFSI) firms are under increasing pressure to operate more sustainably, mindful of their economic, social, and environmental impact. This implies conforming to  Environmental, Social, and Governance (ESG) regulations, which mandate enterprises to be conscious of: their impact on the environment; their relationship with employees, suppliers, clients, and communities; and robust standards on company leadership, risk management, and stakeholder rights. Further, voluntary guidelines such as the Equator Principles, UN Principles for Responsible Investment (PRI), and recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are forcing banks to incorporate ESG as part of their lending, investment, and financing decisions. We strongly believe that today’s voluntary commitments will soon be replaced by hard regulations, and, hence, organizations that embrace these mandates sooner will be ahead of the game, if that comes to pass.

Three aspects drive ESG integration in BFSI operations today: 1) reputation, marketing, and public relations; 2) growing client demand for ESG-conscious investment practices; and 3) regulatory burden. ESG enhances BFSI firms’ brand perception for all stakeholders, including millennial talent, which is more attracted to brands that take firm actions around ESG mandates. Advances in technology and the use of AI / big data / ML are further helping combat challenges related to ESG measurement.

However, these drivers fail to factor in the significant potential to generate long-term risk-adjusted returns through ESG compliance. Our research suggests that firms that can better navigate environmental and social disruptions, while incorporating good governance practices, will be able to mitigate risks and create long-term value.

The exhibit below highlights the various factors contributing to banks’ increased focus on sustainability or ESG.

Exhibit: Factors driving banks’ increasing emphasis on sustainability

Factors driving banks’ increasing emphasis on sustainability

The push of the pandemic

The COVID-19 pandemic served as the first real proof point that ESG investing can future-proof investments and boost returns even in uncertain times, with sustainable funds outperforming their more conventional counterparts. Consequently, ESG investing solidified its position as a dominant feature across the financial services landscape in 2020, with investments in sustainable funds in the US almost twice the previous year’s total.

Leading credit rating agencies such as S&P and Moody’s have indicated that innovative ESG initiatives will help BFSI firms improve financial performance, in turn providing the monetary resources to further enhance their ESG strategies. Further, large fund management firms such as BlackRock Inc., Vanguard Group, and State Street Global Advisors, are making ESG-focused investments. In February 2021, Vanguard appointed Fong Yee Chan as the firm’s first head of ESG strategy for the UK and Europe.

BFSI firms that can swiftly integrate a comprehensive ESG strategy into their investment plans will be able to capture a greater share of ESG asset flows. Such a comprehensive strategy would comprise five aspects:

  1. Developing the ESG strategy
  2. Engaging with different stakeholders across the ESG landscape
  3. Launching new products for the growing demand for ESG investing
  4. Creating the right ecosystem of data providers, requisite frameworks, and technologies
  5. Switching to responsible practices.

Asset managers should therefore think fast and come up with dedicated strategies to capitalize on the opportunities and gain competitive advantage in the long run.

Partnering with technology vendors to navigate the ESG space

Traditionally, ESG was incorporated through exclusionary screening, in which investments that did not align with an enterprise’s beliefs and values were dropped. Later, practices such as thematic investing (supporting a particular ESG area), impact investing (focusing on creating a positive change rather than only financial returns), and best-in-class selection (selecting investments with positive ESG performance relative to industry peers) emerged. Gradually, we are moving toward a comprehensive ESG integration model, wherein investors are systematically and deliberately including ESG-related factors into their complete financial analyses.

However, the lack of a standard taxonomy to capture ESG performance, low quality ESG reporting by companies, and the deficiency of robust ESG data pose major challenges to this integration. Technology vendors in the BFSI space can help enterprises understand ESG processes, ensure compliance, and generate optimal value. These partnerships are increasingly important at a time when corporate ESG disclosures are dramatically improving – 80% of the world’s largest corporations use Global Reporting Initiative (GRI) standards today. Further, the number of signatories to the PRI has increased from 63 investment companies in 2006 to more than 1,700 signatories with US$81.7 trillion in Assets Under Management (AUM) today. In recent times, the International Integrated Reporting Initiative (IIRC) and Sustainability Accounting Standard Board (SASB) frameworks have also been gaining enterprise attention.

We would like to hear your thoughts on ESG and its increasing importance in the BFSI industry. Please reach out to us with your inputs at [email protected], [email protected], or  [email protected].

This is the first blog in this series that explores the ESG space; read the second and third blogs for more insights.

Technology Synergy Drives M&A Spike in the Banking and Financial Services Industry | Blog

Technology used to be an enabling strategic pillar for banks and financial services (BFS) organizations. Now, it is the core of these firms’ value creation playbooks. Indeed, BFS firms are building digital capability platforms using modern technologies to create what we have named SUPER — or Secure, Ubiquitous, Personalized, Easy, and Responsive — banking experiences and optimized operations.

This move to digital would require BFS firms to invest disproportionately in building these industry platforms at speed and scale. M&As (merger and acquisitions) are helping BFS firms trigger this transformation agenda by siphoning off cost synergies from mergers and investing in technology rationalization, modernization, and innovation.

Bloomberg estimated that more than US$500 billion worth of BFS M&A deals happened in 2020. That magnitude is the second highest since the 2008 financial crisis and only lags 2019 by a razor-thin margin due to the pandemic induced slowdown. Our recent analysis found that eight out of ten of the largest M&As in the BFS industry in 2020 mentioned technology synergy as one of the key drivers for the transaction.

Traditionally, acquisitions served as an opportunity to enter new product lines and/or geographies, gain new capabilities, and achieve cost savings and operational efficiencies via technology modernization and streamlining processes and systems. The recent acquisitions in the BFS space have focused additionally on technology synergy and the ability to weaponize the combined technology estate. Technology synergy is achieved in these M&A transactions by:

  • Acquiring digital capabilities and solutions
  • Achieving scale that makes economic sense to invest in building industry platforms using cloud, APIs, and data & analytics technologies
  • Acquiring digital skills
  • Combining discrete technology components of merged entities to create industry platforms.

As mentioned in the image below, leaders at BFS firms undergoing such M&As stress the importance of digital as a lever for these strategic acquisitions. For instance, in the merger of First Citizens BancShares, Inc. and CIT Group, Ellen R. Alemany – Chairwoman and CEO of CIT, who will assume the role of Vice Chairwoman of the combined entity – highlighted how well-positioned the two firms will be to leverage their product portfolio and technology across the franchises, and make additional investments in technology to enhance the customer experience.

Focus on tech synergy causing a spike in M&A activity in BFS

Expansion of the IT estate to build digital capability platforms has created a paradigm shift in business cases for M&As. The platform-based economy not only enables new businesses and systems but also facilitates rapid integration across merged entities.

A notable example is S&P Global’s bid to buy IHS Markit in December 2020, which serves as an example of a technology-driven merger in the financial information and credit rating space. It has created an opportunity for the two firms with unique and harmonizing assets to create a formidable data and technology offering. IHS is the industry frontrunner in leveraging platforms for underwriting corporate stock and bonds and trade processing. The combined entity will become a data powerhouse for complex financial products, and this will directly funnel exponential growth for S&Ps credit rating service, which comprises 40-50 percent of its revenue.

Skill acquisition is gradually gaining popularity across multiple deals. Aspects like digital identity and security are addressed in Moody’s purchase of Regulatory DataCorp (RDC), a provider of KYC/AML data services, and Mastercard’s acquisition of RiskRecon for cybersecurity services. In the platforms/technology space, Charles Schwab acquired the technology and intellectual property of a fintech, Motif. And customer experience took centerstage in Goldman Sachs’ acquisition of United Capital, with a focus on scaling up its UI/UX products. Talent acquisition is another factor that is gaining ground across some of these mergers.

In November 2020, PNC Financial Services acquired the US Operations of the Spanish lender BBVA. And most recently, Huntington Bancshares acquired TCF Financial. The banks are not only increasing their asset size and market reach but also gearing up to save costs by optimizing their IT estate and branch networks. These cost savings are being funneled to build better digital experiences as more customers are opting for online and mobile services for their banking needs.

Similarly, significant deal activity is expected in the asset management space. For example, Macquarie Group is set to buy Waddell & Reed for US$1.7 billion. This traction in asset management is driven not just by pressure on fees and revenue but also by increased costs attributed to technology and digital spending. Asset management firms with deep pockets are already betting heavily on the success of platform- and data-based niche firms. For instance, BlackRock recently purchased minority stakes in the platform-based alternative wealth management firm iCapital Network and the robo-advisor Envestnet.

Our analysis suggests that the M&A trend will pick up for regional and community banks in a bid to gain scale. This is critical to compete with larger players as customer intimacy and relationships move from physical to digital. They will be better equipped to build new capabilities in robotics, AI/ML, and advanced analytics as banking increasingly digitizes. The combined entities will also have a larger pool of resources wherein better skill-to-talent match can be achieved.

BFS M&As will be a boost to the consulting and IT services industry

M&A’s will entail increased spending in post-merger integration and consulting expenditures in the short term. BFS firms will need partners that can create a modernization roadmap for the combined entity. The merged entities can gain significant cost synergies by rationalizing their vendor portfolio and IT estate, as several applications and platforms will become redundant. Hence, a modernization roadmap will enable value creation in the long run.

Of course, the merged entities must also make rapid changes in their working models, delivery strategies, and sourcing decisions to thrive in the new normal. Investments in some specific technologies/tools will ensure growth and continuity of operations. Digital acquisition is thus becoming a table stake as firms determine the right valuation even before they formulate the integration strategy.

Large BFS firms are looking at targets that help them create a digital service model for the future. We are already seeing increased M&A activity among regional banks, asset management firms, and brokerage houses. As we inch closer – hopefully – to the end of the pandemic, BFS firms will be eyeing M&A opportunities that deliver technology synergy and associated business transformation benefits. Picking the right segment, target, and timing of these initiatives will be crucial.

Discover even more insights in the BFS industry in our recent research and reports:

Or if you would like to understand more about the impact of the increased M&A activity in the BFS industry, please reach out to us at [email protected] and [email protected].

Uncleared Margin Rules (UMR) as a Catalyst for Change – from Spreadsheets to Digital Compliance Driven by Data and Cloud | Blog

In the wake of the 2008 financial crisis, leaders of the G20 summit laid out the Uncleared Margin Rules (UMR) as part of the financial regulatory reform agenda. The goal of these rules was increasing transparency and reducing the credit risk posed by major participants in the Over the Counter (OTC) derivatives market. UMR introduced fully bilateral Initial Margin (IM) rules based on theoretical loss, to protect one party against the other party’s default.

The UMR have been rolled out in phases since 2016, and approximately 60 of the largest firms (by assets under management) currently comply with IM rules. Before the onset of COVID-19, 200+ firms were expected to come under the rules’ purview by September 1, 2020, but regulators pushed the timelines to help pandemic-impacted firms focus their resources on managing risks associated with market volatility.

An estimated 1,100 counterparties are expected to come under the combined purview of Phase 5 and Phase 6, which will be rolled out in September 2021 and September 2022, respectively. It is thus inevitable that the significant increase in Newly In-Scope Counterparties (NISCs) will create overwhelming demand on market resources across participants and service providers. To address this demand rush, significant operational and technology-led solutions must be implemented, and most firms plan to engage with external partners to reduce the burden of the additional contractual agreements that must be put in place.

The new rules involve the following major changes across operational processes and legal agreements:

  • Both swap dealers and funds will be required to exchange IM with one another
  • IM must now rest with third-party custodians

If not done in a timely manner, NISCs will not be able to trade in non-centrally cleared derivatives, limiting their options for both taking on and hedging risks, potentially impacting liquidity in the derivatives markets.

Time for change – fighting the legacy

Firms have historically relied on spreadsheets and siloed legacy technology systems to assess their collateral needs, access valuations, and communicate them to counterparties – a cumbersome method that makes the task of UMR compliance all the more difficult.

Though the rules only apply to new transactions, they may, in fact, create multiple workflows for monitoring both new and legacy transactions. Beyond operational updates, firms will need to negotiate and enter into new legal agreements and modify existing ones. In some cases, they may need to alter their trading strategies and operations to mitigate or steer clear of the rules by using portfolio compression or by simply reducing their use of uncleared products.

Thus, to avoid getting caught in a regulatory bottleneck, firms must act now to:

  1. Determine whether the rules apply to them by calculating the Aggregate Average Notional Amount (AANA) of non-cleared derivatives
  2. Identify their IM requirements
  3. Set up a data infrastructure for enhanced transparency and analysis
  4. Choose service providers in the areas of custody, monitoring, and legal services
  5. Create a modern architecture and digital roadmap for UMR or adopt technologies from third-party technology vendors that can be integrated easily into a wide range of asset classes that require IM calculations

Engineering and system integration complexity is bound to increase with legacy systems (which need to be modernized) and the operational changes needed to meet the regulatory guidelines. Thus, firms need to choose the right set of technology vendors and system integration and consulting partners to support them on their compliance journeys. In fact, even firms that do not cross the US$50 million IM threshold will need systems to monitor their IM thresholds regularly, thereby creating a market for cost-effective technology solutions.

Several technology vendors are increasingly building a strong data and cloud technology infrastructure and value-added digital technologies, such as cognitive technologies and interactive visualization, to help optimize costs and better comply with the rapidly changing regulatory landscape. For example, Finastra and CloudMargin have partnered to deliver an integrated collateral and margin management solution to enterprises of all sizes through a SaaS model, facilitating end-to-end straight-through processing of derivatives transactions and all associated collateral management workflows, from trade booking through settlement.

RegTechs providing a helping hand

UMR Technology and Services Vendor Landscape

AcadiaSoft is leading the way in the regulatory technology market with its UMR Collateral Suite and extensive partnerships with technology and data vendors, such as Bloomberg, Cassini Systems, Capco, Calypso Technology, HazelTree, IHS Markit, Murex, and TriOptima, to support organizations in their UMR compliance journeys. AcadiaSoft and TriOptima have partnered for a Phase 5 soft launch aimed at avoiding a compliance crunch near the deadline. More than 30 firms falling under IM Phase 5 have successfully joined the initiative, while another 25 are scheduled to join before the end of 2020.

IT service providers can tap into such opportunities by collaborating with technology vendors to help create a packaged solution, providing the much-needed implementation and deployment support layered with domain advisory capabilities. A notable case in point is the launch of Wipro’s Standard Initial Margin Method (SIMM) in a box solution in collaboration with Quaternion Risk Management.

Embracing the change

New workflows and requirements are set to be introduced as organizations embark on the journey to become UMR compliant. Rather than considering UMR as an additional regulatory burden, firms should leverage this opportunity to reevaluate and reimagine their existing workstreams and use UMR as a catalyst for change to holistically automate and streamline their collateral management.

If you’d like to share your observations or questions on the fast-evolving technology and services landscape for UMR compliance solutions, please reach out to [email protected], [email protected], and [email protected].

BigTechs in BFSI: The Pragmatics of Co-existence for Market Expansion | Blog

Google recently announced that it is teaming with eight US banks to offer checking accounts powered by its Google Pay product and built on top of the banks’ existing infrastructures. Google is not the only BigTech firm that is pushing its play in the Banking, Financial Services, and Insurance (BFSI) industry. Facebook recently launched a new unit called Facebook Financial that consolidates all its payment products under David Marcus, the former President of PayPal. In a call with investors in July 2020, Tesla announced that it is planning to launch a major insurance company.

Eyeing the prizes

The transformation of the BFSI industry is powered by the ability to create innovative products and experiences using digital capability platforms and data. The BigTech firms see this as a massive opportunity to use their digital platforms and data processing infrastructures to gain a significant share of this transformational opportunity in the BFSI industry.

Additionally, the emergence of a globally connected ecosystem and ambient technology have led end customers to demand seamless experiences to manage their lifestyles and finances. Realizing yet another opportunity, BigTechs such as Amazon, Ant Financial, Apple, Facebook, Google, and Microsoft entered the BFSI industry to offer complementary financial services to support the BFSI firms’ core businesses. They gradually started providing technical capabilities to enable BFSI firms to enhance their operations, products, and experiences, eventually offering competing products and services. In fact, today, BigTech firms are at the epicenter of accelerating a shift in both demand and supply ecosystems, blurring traditional industry boundaries.

In our recently released report, BigTechs in BFSI Industry: The Theory of Co-existence for Market Expansion, we analyzed BigTech firms’ investments in the BFSI industry to dissect their strategic bets and provide recommendations for BFSI firms.

Building technological capabilities to compete

Traditional BFSI players are understandably concerned about BigTechs’ increasing sphere of influence, but their complex relationship with BigTechs makes it difficult for them to devise a focused strategy – to compete or collaborate – with their new peers. While some BFSI firms are expecting regulatory scrutiny and industry watchdogs to keep BigTechs away from their turf, others are developing technologies in-house and in collaboration with enterprise technology firms such as SAP, Salesforce, and Oracle to shore up their capabilities. For example, the top five banks in the US recently increased their technology budgets by more than 10 percent, with a large proportion focused on building proprietary technologies and platforms, as well as R&D, to better compete with BigTechs and FinTechs. In 2019, Bank of America alone filed 418 technology patents.

Our viewpoint

We believe BFSI firms should find a fine balance of working with BigTechs as fellow ecosystem players to leverage synergies and create a win-win for all stakeholders.  Here’s why.

A look at BigTechs’ scale of technology investments and R&D reveals that they heavily outperform BFSI firms in their technology capabilities. In 2019, AWS obtained 2,400 US patents and IBM obtained 9,262. These numbers indicate that their technology and research prowess position them as strong allies of BFSI firms. BigTechs have further strengthened their foothold in the industry through open banking and asset and data monetization models. FinTechs are already disrupting BFSI incumbents, with BigTechs powering many of them with technology and funding.

Thus, partnerships with BigTechs and other players in the ecosystem can help BFSI firms strengthen their role as orchestrators of customer lifestyle experiences. Armed with large technology investments and R&D budgets and a wide range of technology and IT infrastructure offerings, BigTechs have a lot to offer to traditional players. Cloud computing services such as Amazon AWS, Google Cloud, and Microsoft Azure can help – and are helping – BFSI firms improve their operational efficiencies and reduce costs. For instance, financial institutions in China are leveraging Ant Financial’s ZOLOZ platform for biometric authentication of customers.

Add to this BigTechs’ data and analytics capabilities, and the value they bring to the table increases manifold. BigTechs are not only helping incumbents manage and analyze their own data, but also offering aggregated data from various sources to support BFSI firms and deliver value to their customers.

And that’s not all. BigTechs enjoy a loyal customer base, and BFSI firms can tap into this vast pool. In fact, customers want to see their favorite banks and BigTechs come together to make their lives easier –the launches of Apple Card and Amazon Visa Credit Card are testimony to this fact.

Partnerships can also help banks reach out to the underbanked and underinsured populations. A case in point is Goldman Sachs offering credit to Amazon sellers. Facebook, with its widespread reach, can also act as a liaison between customers in remote areas and financial institutions that do not have brick-and-mortar branches in such areas. Addressing the issue of financial inclusion will not only help BFSI firms and BigTechs increase their market size, but also benefit the lives of those who still do not have access to credit and insurance.

It’s actually an equal partnership

When striking a bargain with BigTechs, BFSI firms must remember that they are equally powerful in the partnership. Traditional BFSI firms command customers’ trust and are better equipped to manage risk and compliance requirements. In contrast, BigTechs are struggling to make a name for themselves in the financial space and are eager to partner with BFSI firms to leverage the trust they enjoy, their access to vast capital reserves, and to bypass some of the regulatory compliance issues.

This situation makes the alliance between BFSI firms and BigTechs an accord between equals, a relationship that is mutually beneficial and sustainable. BFSI firms should confidently partner, co-innovate, and co-exist with BigTechs not only to carve a bigger share for themselves but also to share the benefits with their customers.

If you’d like to learn more about the role of BigTechs in the BFSI industry, please read our recently released report BigTechs in BFSI or reach out to me directly at [email protected].

From Compliance to Competitive Differentiation: The Open Banking Journey | Blog

A sustained low-interest rate environment is compelling banks to diversify their revenue mix and reduce their dependency on interest-based products. In this scenario, banks’ scaled adoption of open banking – or offering data and services to third parties and customers via Application Programming Interfaces (APIs) – provides them with a unique opportunity to expedite the development of innovative products and services in collaboration with other financial institutions.

The open banking concept emerged in 2015 through a regulatory push for consumer autonomy and transparency, with banks in the UK and other European countries mandated to comply with the standards set by the Competition & Markets Authority (CMA) and the European Commission, respectively. However, as our second Open Banking PEAK Matrix® Assessment 2020 (which analyzed 110+ production-grade open banking use cases) reveals, open banking has fast evolved from a compliance-mandated initiative to a growth strategy focused on experience and product differentiation.

In our first open banking assessment carried out in 2018, we found that more than 40% of banks viewed open banking largely as a compliance mandate. In 2019, however, their priorities seemed to have shifted, with more than 35% of banks focused on driving business value and growing revenues from their open banking initiatives. The use cases have also evolved in line with this shift – from payment processing to complex processes such as cash management, financial wellness, credit scoring, and insurance.

The exhibit below highlights the key differences between a compliance-led open banking initiative and one driven by competitive differentiation.

The next step in the open banking journey – moving from compliance to competitive differentiation

Annotation 2020 07 02 154320

Currently, several leading banks are creating differentiated experiences using open banking to build the next-generation banking model. For instance, Bank of America is building a financial services-compliant cloud that will allow the bank and its partners to host all their services and data on the cloud platform, which will enable Bank of America’s customers and third parties to build applications that leverage these services and data to create differentiated experiences and manage end-to-end business operations. Another notable example is DBS, which has established travel, car, and property marketplaces by building robust ecosystems in collaboration with external partners. For example, the company’s payments-enabled travel marketplace brings flight booking, accommodation, and travel insurance partners onto the same platform, ensuring minimal customer churn from its banking platform. As the marketplace offers new customers as well as a payment processing functionality to its partners, DBS can earn commission revenue from these partners.

As banks move to a business value-driven approach to open banking, they need to identify the avenues to monetize their open banking investments and unlock a new model to create and deliver differentiated experiences to their customers.  A cloud-enabled platform can greatly assist in this regard, as it provides seamless access to banking APIs and services from a broad range of partners to build and deploy new products in a marketplace model.

Open banking IT service providers can help banks build the capabilities they desire. To do so, they are investing in business advisory assets to help financial services firms plug the gaps in their business change management initiatives. They are also investing in FinTech partnerships, talent and solutions across the API management life cycle, data and analytics, use case libraries, and virtual sandboxes to maximize the value from open banking.

Leading IT service providers, such as Accenture, HCL Technologies, NTT Data, TCS, and Wipro, have created open banking Centers of Excellence (CoEs) to drive a coordinated effort to help BFS firms eliminate any gaps in communication and realize the objectives of product development and open banking technology. They are also investing in cloud offerings to facilitate their BFS clients’ cloud transformation journeys.

If you’d like to more about open banking and its evolution, please read our recently published report Open Banking IT Services PEAK Matrix® Assessment 2020: Moving Beyond Compliance to a Platform-based Operating Model of Ecosystem Orchestration and Value Creation – Services. We’d also love to hear about how you are advancing on your open banking journey. Do share your views with us at [email protected] and [email protected].

Network Resource Planners (NRPs) and the Transformation of the Enterprise Resource Planning (ERP) Landscape | Blog

Nearly five decades after the release of the first version of SAP’s enterprise application, SAP R1, the Enterprise Resource Planning (ERP) landscape is nearing an inflection point. Over these 50 years, traditional industry boundaries have blurred, and competitors have started working together. Soon, enterprise applications too will transcend functional, organizational, and industry boundaries to support truly connected ecosystems. In the long term, enterprise resource planners will have to develop capabilities to manage decentralized identities, trust, and transaction processing to serve enterprises effectively.

Blockchain, which has been gaining traction steadily over the years, could be the next big thing in the ERP landscape. As enterprises limber up for cooperative ecosystems, participation is rising in inter-industry blockchain networks. These managed business networks, including We Trade, Marco Polo, and TradeLens, are proving to be viable alternatives to certain ERP functionalities. Enterprise application heavyweights such as Oracle and SAP have also begun to push new managed blockchain platforms and are actively assisting enterprises in setting up blockchain networks. We consider such blockchain-based Network Resource Planners (NRPs) – which are comprehensive inter-industry networks catering to a wide range of use cases – to be the natural progression of ERP solutions.

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Understanding NRPs

An NRP is a blockchain-based software system that helps manage data and processes across multiple stakeholders in a business network. In an NRP, the blockchain is the foundational infrastructure, and it acts as a platform for enterprises to deliver a more cohesive experience to customers. Present-day NRPs can perform certain narrow ERP functions, such as inventory tracking, financial settlements, and reconciliations. In these use-cases, NRPs can simplify and accelerate such functions by leveraging blockchain’s technological advantages and the ecosystem’s strengths.

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Let’s take a look at the benefits of an NRP in detail.

An NRP helps stakeholders by:

  1. Building a foundation of trust: The underlying blockchain network creates a single source of truth for all network participants and avoids the need for data duplication across the transacting stakeholders. Blockchain also helps optimize and automate processes that would otherwise be bogged down by the limitations of ERP. With all stakeholders being on a single network, the need for specialized interfaces among the stakeholders’ enterprise applications is eliminated
  2. Acting as the backbone of the ecosystem-thinking movement: The presence of multiple competing stakeholders often undermines the creation of a cooperative ecosystem. An NRP mitigates this challenge by leveraging blockchain to distribute trust among stakeholders. Governance structures can be codified into the technology, putting to ease many enterprise business concerns. This could make NRPs the backbone of the impending ecosystem-thinking movement, assisted by the ongoing convergence of Internet of Things (IoT), blockchain, and Artificial Intelligence (AI)
  3. Unifying stakeholder experiences: Traditional enterprise applications create bottlenecks and eventually impact stakeholder experience. A cooperative network helps standardize processes that establish a baseline experience that is consistent across the network

Business challenges and how to navigate them

Although NRPs are fast gaining traction and offer multiple benefits, an ecosystem model still poses several challenges, such as:

  • Establishing cohesion among competitors in a collaborative environment to ensure consensus and fairness
  • Ensuring appropriate governance, monetization, and optimization of Return on Investment (RoI)
  • Addressing any network lock-in risk, which may deter participants from fully committing to the network; managing this concern through standardization rules will be key to creating viable networks
  • Managing the change ushered in by blockchain adoption, which may be incompatible with existing processes and limited understanding of technology

To successfully address these challenges and leverage NRP, enterprises should undertake a structured adoption journey, comprising four phases:

  1. Selecting the foundational approach and identifying key stakeholders: A network can be built through either a technology- or business-first mindset. The right approach depends on the primary contributing industry, proposed network use case, and prevalent market conditions. In either case, it is also important to simultaneously identify the target stakeholders for the network
  2. Building the minimum viable ecosystem: The next phase involves demonstrating the viability of such a network through a pilot. The pilot also helps identify possible problems early on and creates the foundational data to build a business case for a full-fledged network
  3. Defining the governance structure and incentive model: Defining and codifying the intended governance structure and incentive model help lend credibility to the network. Establishing such rules helps build trust among potential participants and attract new ones
  4. Activating the network effect: Encouraging stakeholders from other industries will help build an ecosystem of primary, secondary, and value-add participants that further enhances the network effect

In conclusion, NRPs seem well-positioned to replace certain ERP functions, and such blockchain-based networks, alongside IoT and AI, can become the foundation of future innovations.

If you wish to learn more about the blockchain landscape, network resource planners, and how enterprises can adopt them, read our recently released report. We’d also love to hear your views on blockchain and NRPs. Please share your perspectives and any questions with us at [email protected] and [email protected].

Is COVID-19 Accelerating Responsible Investing in the Financial Services Sector? | Blog

Climate risk discussions and regulations had been gaining great momentum in the past six months as there had been increasing pushes from regulatory bodies and central banks to start stress testing climate risk scenarios. While the discussions have been somewhat back-burnered due to the pandemic, they will begin again in earnest during the post COVID-19 recovery period. And they will jump to the top of financial institutions’ (FIs) risk management agendas, instead of continuing to be considered a CSR activity.

Why COVID-19 will accelerate ESG reporting

Given the erosion in investment value across asset classes over the last couple of months, investors are looking to get better returns, and Environmental, Social, and Governance (ESG) funds have performed better. Indeed, a Morningstar analysis of 206 responsible investing funds found that 70% of these equity funds outperformed their peers in Q1 2020.  As the social component of ESG brings to focus companies’ relationships with their employees and customers, the governance aspect will also gain attention. Dedicated risk committees and boards of directors will set the tone for firms’ communication and branding strategies.

Another driving force will be the rising influence of millennial investors. As they move toward more socially responsible investing, firms that achieve high ESG scores will be the preferred choice for these investors. FIs won’t want to miss out on this growing segment and will look to align their portfolios accordingly to be an attractive investment opportunity. This change will spur the ESG reporting initiatives at these institutions and lead to evolution of the industry ecosystem as well.

Evolution of the industry ecosystem

FIs have ramped up hiring as they build their sustainability teams and task forces. Credit rating agencies and data firms like Moody’s and S&P have started to acquire climate risk analytics firms to enhance their coverage of ESG data reporting. Stock exchanges around the world are launching multiple ESG indices to measure listed companies’ commitment to ESG. Asset management firms are gradually incorporating ESG factors into their investment strategies while announcing divestment from industries that are considered problematic from an ESG reporting perspective. We are also seeing an uptick in the demand for sustainability consultants at financial services firms, with more than 15% year-on-year growth as demonstrated by job postings for sustainability roles in the financial services industry.

Current challenges for financial institutions

No clear framework has yet been institutionalized for FIs to start reporting their climate disclosures. Only broad frameworks exist that can serve as a baseline for them to start initiating stress tests and checking their exposures. Further, they face two major problems with consolidating and analyzing the right data sets. One is identifying the right data sources and the kind of data needed for analysis. The other is defining the methodology they should use to analyze these data sets. FIs’ existing analysis models and scenarios have been built with a timeline of five to 10 years. But incorporating climate risk into them requires scenario planning that looks 15 to 25 years into the future and into past data records as well.

So, what are the implications for FIs as climate talks and green investing discussions gain momentum?

  • Uptick in demand for data science teams and AI/machine learning themes FIs will need to set up extensive data warehouses and data lakes to analyze large and complex data sets to make efficient decisions. AI and machine learning themes will help in identifying correlations and anomalies in the comprehensive company data. There will be a rise in demand for AI programs and NLP algorithms that can help in assessing these data points.
  • Talent conundrum for executing sustainability initiatives In addition to the technology talent needed to tap into the data sets, there will be demand for sustainability consultants, ESG portfolio managers, and analysts who can act on the data insights. FIs will need to tap young talent from premier institutions and grow in-house talent to scale the talent landscape for sustainability initiatives.
  • Incorporate ESG data from partners into risk management FIs will have to embed ESG analysis into various facets of risk management like credit risk calculations and use it to identify and quantify the impact of emerging risks. The need for comprehensive climate risk data is fueling the emergence of ESG ratings data by start-ups and credit ratings firms like S&P. Partnering with one of these vendors will provide access to these scores that FIs can incorporate in the broader analysis.
  • Investments in communication and branding initiatives Given the rise of millennial investors who prefer to align their investments with their values, FIs will need to substantially invest in building a socially responsible brand to bring forth the right narrative. Thus, FIs will need to review their portfolios to align with ESG values and bring in the right industry leaders to drive the sustainability agenda.
  • Increased interest in service providers’ carbon footprints Increasing pressure on FIs for responsible and green investing will soon start to impact their sourcing decisions. Outsourcing and vendor management teams should start to assess their vendor portfolios on sustainability considerations like green procurement policy, waste management, carbon management, etc.

Everest Group’s take

Purpose-built platforms that are digital and cloud-ready for FIs to cost effectively scale their ESG strategies are currently in their nascent stages. There’s an urgent need to fill this gap.

There’s no single source of truth for the ESG data and the methodology to analyze it. FIs are unsure which data scores to utilize in their analysis and are increasingly setting up in-house ESG platforms to analyze ESG data and manage the end-to-end product value chain. This is a greenfield opportunity for vendors to gain first-mover advantage in this dynamic scenario and onboard FIs onto their platforms.

The current health crisis has only reinforced the need for sustainable investing, and governments have mobilized efforts to stress test their financial services sectors. As supply chains across the world are disrupted, investors are looking for safe havens in the form of companies that can weather such crises. FIs need to act fast to capture market share from the new generation of investors and tap into returns from ESG funds or risk being disintermediated in the long run.

What’s your take? What technology and data analytics challenges have you faced in your ESG journey? Please write to us at [email protected] or [email protected] to share your experiences, questions, and comments.

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