Tag: BFSI

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.

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].

Can Your Shared Services Group Manage Enterprise Risk? | Blog

The financial crisis of the late 2000s, increasingly stringent regulatory requirements, growing competitive pressures, and a host of other factors have vaulted the risk management function to new heights of strategic importance for banking, financial services, and insurance (BFSI) companies.

Our ongoing research in the sector shows that most enterprises handle risk management out of their onshore headquarters locations, rather than giving ownership of the function to their offshore shared services centers, or what we call Global in-house Centers (GIC).

When we asked BFSI companies why they were keeping risk management on their home turf, they cited several reasons:

  • Because they’re still trying to streamline their risk management frameworks, structures, and processes, they’re unclear what to keep onshore and what to offshore to GICs
  • As risk management is becoming an increasingly critical component of the overall enterprise strategy, they view offshoring the function as a risky move
  • They’re concerned that the offshore talent lacks the needed business acumen and understanding of sourcing geography’s regulations
  • They feel constant interaction and frequent coordination with multiple business units and teams is the first line of defense for reducing risk at the origin

What’s the common thread behind all these rationales? They’re all perceptions, rather than reality.

In fact, our research shows that GICs are particularly well-suited to deliver the risk management function. Why?

  • Many shared services organizations are the driving force behind their enterprise’s digital, automation, and analytics initiatives, and their deep knowledge in these specialized capabilities can be highly useful in the risk management function. And there are synergies in areas such as risk modeling, forecasting, scenario analysis, and reporting. For example, a leading bank’s GIC has successfully automated local regulatory reporting, and is transitioning to be a centralized reporting team
  • There is a dearth of risk talent globally, but offshore GIC locations, such as India and Poland, have strong, solid pools of talent with deep risk management knowledge. This talent is coming from their domestic market (e.g., local banks) and existing GICs that, over time, have scaled their risk management function
  • To deliver real risk management value to the business, the GIC and the group risk team must be integrated; shared services groups have already cracked this operating model way back in areas such as investment research (e.g., sell-side and buy-side) and actuaries (e.g., pricing and valuation).

How can your shared services organization assume responsibility for your enterprise’s risk management function? Like most GICs, yours was probably established to handle scale-oriented transactional work. But risk is about value, not scale. So, you need to change your parent company’s mindset about your group’s capabilities by proactively identifying, proposing, and demonstrating how you can add value and be a strategic partner in managing risk.

Here are a couple of examples that may help get your creative juices flowing:

  • One GIC parlayed its experience with machine learning algorithms to build “Challenger Models” that significantly increase the precision of dataset validation for its company’s credit analysis
  • Another shared services group championed creation of its company’s “Operational Risk Center of Excellence” through process enhancements, global transformation projects, continuous process review and improvement mechanisms. This helped streamline and simplify various processes and risk frameworks.

Our two cents to enterprises: you stand to lose a lot if your risk management capability isn’t up to snuff. Your best solution may be right in front of you, even if not geographically right next to you.

What Analytics Hot Spot Is Right For Your BFSI Business? | Blog

Enterprises that operate in the BFSI industry are the biggest consumers of analytics services. They realized earlier than companies in other sectors how powerful analytics can be in offering targeted and customer-centric solutions, exploiting the massive amount of available data, meeting dynamic customer demands with their expectation for real-time solutions, and helping them adapt to changing business environments.

There are four different regions around the world that provide analytics services to BFSI companies: India, Asia-Pacific (APAC,) nearshore Europe, and Latin America. Each has its own unique capabilities, characteristics, and value proposition.

To help BFSI firms select the right delivery location for their specific needs, we recently completed a “Locations Insider Report” named Global Hotspots – Analytics in BFSI.

Following is a look at the findings. To add context to them, we classify analytics solutions into four types based on their sophistication and business impact, as you see here.

What Analytics Hot Spot is Right for Your BFSI Business?

India

India is the leading delivery destination for analytics services in the BFSI industry. It has a large talent pool (more than 65 percent of the global sourcing FTEs in nearshore/offshore locations,) and offers high cost arbitrage. Because of these factors, a large number of BFSI companies have chosen to set up analytics Centers of Excellence (CoE) in key tier-1 locations such as Bangalore, Delhi NCR, and Mumbai. While both tier-1 and tier-2 locations support traditional analytics services delivery, and largely support customer, fraud, and finance risk analytics functions, advanced analytics services delivery is concentrated in tier-1 cities.

India is also seeing an uptick in start-up activity in analytics services delivery across multiple functions including customer, credit, fraud, and risk. Because these service provider start-ups can provide accelerated access to skilled resources either through partnerships or acquisitions, BFSI companies may want to factor this into their location selection strategy. In the PEAK Matrix evaluation included in our report, Bengaluru and Delhi emerged as “Leaders” because of their high cost arbitrage and significant talent availability. We identified Mumbai as a “Major Contender” due to its healthy mix of cost arbitrage and talent availability, and high maturity in traditional analytics services delivery.

APAC (excluding India)

Manila and Shanghai are the top locations in the APAC region. While services delivery is dominated by service providers offering traditional analytics services, a few locations also have a sizable shared services – or global in-house center – presence. The geography primarily supports finance and fraud risk management functions, and some companies are setting up analytics CoEs.

Nearshore Europe

In nearshore Europe, the top analytics services delivery locations are Budapest, Edinburgh, Prague, and Warsaw. While companies leverage the geography for both traditional and advanced analytics, advanced analytics services delivery for fraud and finance risk management is gaining traction, primarily due to region’s availability of high-quality talent and the ability to support work in many European languages. Certain nearshore locations, such as Belfast and Edinburgh, support high-end predictive and prescriptive analytics, not only because a highly qualified workforce is available, but also because of the need for advanced processes to be in proximity with business customers. Just like India, Poland is experiencing an uptick in start-up analytics service providers.

Latin America

Latin America is an emerging destination for analytics services. One of its key advantages is its ability to provide real-time monitoring and data analysis to the North American market due to its similar time zone. BFSI companies primarily leverage key locations in the region, such as Mexico City and Sao Paulo, for traditional analytics services across risk management functions such as credit and fraud.

Because of all that’s at stake, BFSI companies need to carefully evaluate locations for analytics services delivery against their specific business requirements. To learn more about the global analytics services landscape – availability of both entry-level and employed talent pool, market maturity, cost of operations across top locations, and implications for stakeholders including service providers, GICs, BFSI companies, country associations, and industry bodies – please read our recently released report, “Global Hotspots – Analytics in BFSI.”

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