The Responsive Bank. Feature article in Q factor Oct 2014

Issue 07 | October 2014 sqs.com

Articles inside• The Responsive Bank

• Digital and Data Disruptions in Financial Services

• Unified Risk Management and Reporting

• Different Facets of Mobile Testing

• Quiz

The Q-Factor BFSI2

by Simon Terry

Organizations in the financial services business are today facing a far more challenging and rapidly changing environment, driven by the fall out of the global financial crisis and ongoing digital disruptions. There are new customers,newer regulations and competitive changes that demand greater agility and a more customer-focused approach that leverages the creative potential of its people. The time has come for the Responsive Bank.

Signals from the Edges

Something is up in banking! Many signals highlight the fast changing environment:

• Wells Fargo has announced a start-up accelerator for financial- services start-ups.

• Commonwealth Bank has made its digital technology advantages a key part of its strategic positioning.

• BBVA has launched an open innovation program to help accelerate its innovation agenda.

• Westpac NZ has partnered with a start-up ‘Moven’ to enhance its mobile internet banking capabilities.

• Financial services executives from around the world have been travelling to Kenya to better understand the success of Safaricom’s highly acclaimed M-PESA mobile payments system.

• World over banks are embracing social media for marketing, customer service and for deepening connections with to the community.

Globally banks are looking for newer, faster and more innovative ways to respond to the changing market. Customer expectations are rising

The Responsive Bank

Digital transformation is reshaping the way we live and do business. On the ground, strong and sustainable processes to improve and assure software quality are driving markets. Accordingly, ‘Meghaduta’ the cloud messenger is being superseded by the Q-factor!

The BFSI sector is expected to introduce and quality assure new and innovative technologies to speed up development cycles in the service of the evolving and demanding customer. Newer experiences, competition and cost pressures along with the onset of card and mobile technologies are increasing the pressure on software services and products to sustain quality.

Manual systems that limit scaling are yielding place to automation. Globally, the agenda of universal financial inclusion is rapidly expanding the banked base of the pyramid.Optimization of operational, distributional, transactional and infrastructural costs, while simultaneously creating last-mile delivery channels, tailored to specific market needs,is taking priority. The Q–factor is thus becoming paramount to success and sustainability.

Amidst these trends and rapid changes Thinksoft Global Services is now renamed as SQS India BFSI, the Indian Banking, Financial Service & Insurance arm of the world leader in software quality!

The Quality Factor

Financial Inclusion (FI) being critical to economic growth and socio economic stability, the World Bank has set a target of universal FI by 2020. An onerous task considering that only around 50% of the adult population in the world has a bank account! This translates to an unbanked population of 2.2 billion adults in Africa, Asia, Latin America and the Middle East.

With an unbanked population of 395 million, the Government of India is seized with no less a challenging task. Launched in September 2014, the Prime Minister’s Jan Dhan Yojana (PMJDY) seeks to provide bank accounts to 75 million households in six month’s time, which in the first phase would include OD facilities, insurance cover and RuPay Debit and Kissan Cards.

It is globally acknowledged that no-frills bank accounts of the PMJDY genre, relaxation of KYC norms, General Credit Cards (GCC), opening of branches in rural areas, expansion of the Business-Correspondent (BC) network, Electronic Benefit Transfer (EBT), simplified authoriza-tion and the use of mobile technology are the eight key factors that

could, on the demand side, accelerate FI. Challenging from a management point of view and even more so from a user acceptance testing (UAT) perspective.

800 million of the Indian population is set to be covered by mobile networks. Barebones mobile phones seamlessly incorporated through formal payment banks and authenticated mobile payment systems and further expansion of the BC network would progressively ensure 100% financial inclusion. In parallel, a challenge to be overcome lies in the fact that mobiles are the most complex to test and certify considering the numerous types of devices, technologies, terminals, interfaces and applications involved.

These challenging and exciting developments in the emerging markets would also have a huge impact on the further growth of the established banks in UK and USA.

Martin Müller - Managing DirectorSQS India BFSI Ltd.

Editorial: Providing the technology edge to Financial Inclusion

Issue 07 | October 2014

with exposure to digital transformation across many industries. Banks are increasingly aware of the threats posed by disruptive competitors ranging from new intermediaries and even peer-to-peer lending. Changes in the regulatory environment also play a role in the need for banks to connect with customers and the community. The 2008 Global Financial Crisis (GFC) impacted the reputation of the industry in many markets and created new regulatory pressures driving customer focus. The GFC refocused the attention of banks on the need to deliver exceptional service under traditional lines of business to win funding and grow revenues in the face of an increasingly savvy customer. In Australia, the Reserve Bank of Australia is seeking to drive disruptive innovation in payments with a view to pressurizing banks to innovate in the interest of consumers.

What is a Responsive Bank?

The Responsive Organisation is a movement of influencers, organisations and change agents who believe in the need for change to enable them to respond to their customers, communities and a competitive market. The traditional models inherited from the beginnings of management era at the start of the 20th century struggle to engage employees, to manage change and to realise the innovation demanded of organisations. New ways of working are required in an environment of digital disruption.

The Responsive Bank is one that focuses on a number of key shifts designed to move management from a focus on efficiency to a focus on effectiveness:

• From profit to purpose: Clarity of purpose, the rationale and impact of the organisation on others, is a key way for organisations to engage the employees and community. Purpose is critical to guide innovation and generate discretionary effort.

• From hierarchy to autonomy: Traditional hierarchy assumes that the challenges are efficient allocation in a relatively static environment. To adapt to rapid change and deliver excellence in service, organisations need to empower people to respond to the market and solve issues. Allowing employees greater autonomy and pushing decisions closer to the edges of the organisation are important to increase effectiveness.

• From secrecy to transparency: In a world of networks, secrecy is a sub-optimal strategy. Banks are increasingly focused on how to leverage information more quickly.

• From control to experimentation: Experimentation at the edges enables the Bank to learn faster and to engage with opportunities to move the organisation forward faster.

• Embracing networks through and around the Bank to engage wider communities, deepen trust and learn faster.

Becoming a More Responsive Bank

Many of these changes are difficult for a traditional Bank to consider and even harder to embrace. However, the elements of a Responsive Bank are not an absolute standard. Each bank will need to set its own response to each of these changes to reflect its customer demands, market conditions and competitive threats. The evolution will involve a cultural change as well as a change in systems and approaches. Four key actions will underpin any Bank looking to make this transition:

• Adopt an outward orientation: In the new competitive environment, customer insights and community reputation play an increasing role in success. Financial services organisations need to put in place the processes to drive decisions based on external insights and leverage external capabilities. In this context the questions to ask would be: Does customer data drive your business decisions? Do you have a customer experience design team? Have you understood the implications of the disruptive threats at the edges of the industry from payments technologies, new analytical approaches, new entrants like supermarkets, etc? How are you reaching out to your disgruntled stakeholders to listen and engage them?

• Network the organisation and its communities: Most Banks struggle to share what they know. Focus on networking the organisation to improve the speed of leverage of knowledge and to accelerate responses to change. For example, NAB uses Social media monitoring externally and Yammer, a private social network, internally to connect its people, to share information and to innovate and is delivering significant business value benefits. What connects your communities?

• Embrace experimentation: Disruptive innovators relentlessly experiment. Experimentation on hypotheses is the heart of lean start-up methodology. Help your organisation to learn faster by moving from certainties to hypotheses through open experimentation. The BBVA program mentioned in the introduction is one such program. How often do you experiment and how do you leverage the capabilities of those for whom it is lifeblood.

• Focus on leadership in every role: Enabling people to respond to the circumstances that they see before them is important. Give people the authority and the capability to use their potential to continuously improve the organisation. Do your customer-facing people have the freedom to deliver exceptional customer experiences? Do all members of your staff have the ability to suggest improvements when they find something that is broken? Great banks make leadership everyone’s role.

Financial services have a long and successful history. The models of management in banking today have an equally long history. A changing environment as a result of changing customer and competitive behaviour asks new questions of the management of all banks. The Responsive Bank offers new ways of working for all banks to consider in improving the effectiveness of their response to change.

by Simon Terry

Organizations in the financial services business are today facing a far more challenging and rapidly changing environment, driven by the fall out of the global financial crisis and ongoing digital disruptions. There are new customers,newer regulations and competitive changes that demand greater agility and a more customer-focused approach that leverages the creative potential of its people. The time has come for the Responsive Bank.

Signals from the Edges

Something is up in banking! Many signals highlight the fast changing environment:

• Wells Fargo has announced a start-up accelerator for financial- services start-ups.

• Commonwealth Bank has made its digital technology advantages a key part of its strategic positioning.

• BBVA has launched an open innovation program to help accelerate its innovation agenda.

• Westpac NZ has partnered with a start-up ‘Moven’ to enhance its mobile internet banking capabilities.

• Financial services executives from around the world have been travelling to Kenya to better understand the success of Safaricom’s highly acclaimed M-PESA mobile payments system.

• World over banks are embracing social media for marketing, customer service and for deepening connections with to the community.

Globally banks are looking for newer, faster and more innovative ways to respond to the changing market. Customer expectations are rising

The Q-Factor BFSI 3

with exposure to digital transformation across many industries. Banks are increasingly aware of the threats posed by disruptive competitors ranging from new intermediaries and even peer-to-peer lending. Changes in the regulatory environment also play a role in the need for banks to connect with customers and the community. The 2008 Global Financial Crisis (GFC) impacted the reputation of the industry in many markets and created new regulatory pressures driving customer focus. The GFC refocused the attention of banks on the need to deliver exceptional service under traditional lines of business to win funding and grow revenues in the face of an increasingly savvy customer. In Australia, the Reserve Bank of Australia is seeking to drive disruptive innovation in payments with a view to pressurizing banks to innovate in the interest of consumers.

What is a Responsive Bank?

The Responsive Organisation is a movement of influencers, organisations and change agents who believe in the need for change to enable them to respond to their customers, communities and a competitive market. The traditional models inherited from the beginnings of management era at the start of the 20th century struggle to engage employees, to manage change and to realise the innovation demanded of organisations. New ways of working are required in an environment of digital disruption.

The Responsive Bank is one that focuses on a number of key shifts designed to move management from a focus on efficiency to a focus on effectiveness:

• From profit to purpose: Clarity of purpose, the rationale and impact of the organisation on others, is a key way for organisations to engage the employees and community. Purpose is critical to guide innovation and generate discretionary effort.

• From hierarchy to autonomy: Traditional hierarchy assumes that the challenges are efficient allocation in a relatively static environment. To adapt to rapid change and deliver excellence in service, organisations need to empower people to respond to the market and solve issues. Allowing employees greater autonomy and pushing decisions closer to the edges of the organisation are important to increase effectiveness.

• From secrecy to transparency: In a world of networks, secrecy is a sub-optimal strategy. Banks are increasingly focused on how to leverage information more quickly.

• From control to experimentation: Experimentation at the edges enables the Bank to learn faster and to engage with opportunities to move the organisation forward faster.

• Embracing networks through and around the Bank to engage wider communities, deepen trust and learn faster.

Becoming a More Responsive Bank

Many of these changes are difficult for a traditional Bank to consider and even harder to embrace. However, the elements of a Responsive Bank are not an absolute standard. Each bank will need to set its own response to each of these changes to reflect its customer demands, market conditions and competitive threats. The evolution will involve a cultural change as well as a change in systems and approaches. Four key actions will underpin any Bank looking to make this transition:

• Adopt an outward orientation: In the new competitive environment, customer insights and community reputation play an increasing role in success. Financial services organisations need to put in place the processes to drive decisions based on external insights and leverage external capabilities. In this context the questions to ask would be: Does customer data drive your business decisions? Do you have a customer experience design team? Have you understood the implications of the disruptive threats at the edges of the industry from payments technologies, new analytical approaches, new entrants like supermarkets, etc? How are you reaching out to your disgruntled stakeholders to listen and engage them?

• Network the organisation and its communities: Most Banks struggle to share what they know. Focus on networking the organisation to improve the speed of leverage of knowledge and to accelerate responses to change. For example, NAB uses Social media monitoring externally and Yammer, a private social network, internally to connect its people, to share information and to innovate and is delivering significant business value benefits. What connects your communities?

• Embrace experimentation: Disruptive innovators relentlessly experiment. Experimentation on hypotheses is the heart of lean start-up methodology. Help your organisation to learn faster by moving from certainties to hypotheses through open experimentation. The BBVA program mentioned in the introduction is one such program. How often do you experiment and how do you leverage the capabilities of those for whom it is lifeblood.

• Focus on leadership in every role: Enabling people to respond to the circumstances that they see before them is important. Give people the authority and the capability to use their potential to continuously improve the organisation. Do your customer-facing people have the freedom to deliver exceptional customer experiences? Do all members of your staff have the ability to suggest improvements when they find something that is broken? Great banks make leadership everyone’s role.

Financial services have a long and successful history. The models of management in banking today have an equally long history. A changing environment as a result of changing customer and competitive behaviour asks new questions of the management of all banks. The Responsive Bank offers new ways of working for all banks to consider in improving the effectiveness of their response to change.

Simon Terry, a consultant based in Melbourne Australia, is speaker and writer on Innovation, Customer Experience, Leadership and Collaboration, a Partner of ‘Change Agents Worldwide’ LLC, an international network of change agents, he holds the shared purpose of helping organisations leverage disruptive technologies and future work practices.

A double major in Economics and Law and an MBA from the University of Melbourne, Simon spent over a decade with the National Bank of Australia (NAB) rising to be the CEO of HICAPS, NAB’s Insurance and government payments business. He is also a Member of the Board of the Melbourne Chamber Orchestra, an Advisor at Sidekicker Pty Ltd and a Council Member of Haileybury.


by Paddy Ramanathan

Banks and Credit Unions are facing competition on all fronts, especially from Non-Bank challengers and cutting-edge banks that are putting digital and big data technologies to work. Non-Bank challengers in small business lending, and to some extent consumer lending, wealth management, and payments, are attacking traditionally safe revenue sources. They are delighting customers by making their experience as easy as digital natives; Amazon, Google and Facebook. Cutting-edge banks are boosting revenues, cutting costs and improving customer experience by using digital and big data analytics.

The current era of digital and big data is changing the game driven largely by customer expectations. We see four broad areas of focus:

Digital and Data Disruptions in Financial Services

Area of Focus

Credit decisioning for small businessusing big data

Software based Wealth Managementand Advise - RoboAdvisor

Mobile Payments and Value-Added Services

Customer and Market Intelligence and Digital Marketing

Description

Leveraging data to determine credit-worthiness and income potential overtraditional backward looking credit history schemes and creating near-real time digital loan origination applications

The traditionally high-touch advice business is getting disrupted with digital “RoboAdvisor” that are better, of high quality, more economical and with lower account minimums.

Smartphone based payments for goods and services and value-added services like loyalty, special offers, and specialized payments like healthcare payments.

Traditional inside-out sales and marketing techniques are being replaced by outside-in techniques, where the decision journey and experience of the customer is personalized with the channel experience of choice. Big Data Analytics and Digital are not only used for finer targeting and optimizing campaigns but also used to provide a seamless experience in customer’s purchase journey by understanding their motivation, activities, and barriers.

Examples

OnDeck.com, Kabbage.com and several othersBBVA Compass Bank in partnership and several other banks

Wealthfront.com, Personalcapital.com, Betterment.com and several othersVanguard and other wealth managers

PayPal, Square, Sage and several othersUS Bank (Peri), Wells Fargo and several others

Data providers like Acxiom, IXI, Experian, MasterCard Advisors. Social Media companies like Facebook, Google and Big Data platform providers like Teradata.JP Morgan Intelligent Solutions – exclusive group inspired by the data economy and the opportunity to create information based products that reinvent business, change lives, and create new commercial value for the firm.Barclays Information Business and Wells Fargo Data have similar focus

The Q-Factor BFSI4

We will now review the first two categories of how non-bank innovators and leading edge banks are leveraging Mobile, Big Data, Social Media and the Cloud to disrupt traditional financial services and review the economic value potential of the disruption.

Big Data based Credit Decisioning for Small Businesses makes Credit more available.

Non-bank lenders such as OnDeck and, Kabbage have created a platform that can determine the credit-worthiness and future income

potential of the small business borrower by looking at a wide variety of data points to process a loan in real-time online. Lenders cross-analyze business performance data (such as cash flow, customergrowth, depth of transaction volume, shipping data), social media sentiment about the business and other open-data and are able to create forward looking view of creditworthiness that is more effective than traditional (FICO scores; Fair Isaac Corporation scores, credit scores) backward looking credit history. This type of lending is transforming the small business lending space. Borrowers not only prefer this form of lending due to its sheer convenience when


compared to the traditional process of submitting tax records, business plans, etc. This mechanism brings into the credit pool a lot of borrowers who otherwise would not be eligible for credit. The same data based techniques also yield insights to when and which small business needs credit and that can be used for effective targeting and acquisition.

Key Enablers:

• Big Data or the ability to learn, infer and analyze multiple forms of data and predict outcomes with greater accuracy then before, and

• Digital technologies that extend the reach and make the process of getting a loan the same as buying a book on Amazon.

Market Size and Growth

Total loans are about $3B and are growing at CAGR of 100% to 150%. Shifting models in Wealth Management – The advent of the Software based Advisors caters to the new generation of wealth of customers

With the demographic shift of wealth from baby-boomers to Millennials, estimated to have $7T by 2018 compared to $2T in 2013,traditional wealth management models are changing. As information proliferates and technology and decision sciences expand, new models for obtaining advice and managing wealth are emerging. The change is much broader than just new to olsets but represent a fundamental shift in the business model.

We see data and analytics coupled with enhanced visualization substituting the traditional high-touch advisor/client interactions. A software-based model can learn the goals and preferences of a customer and design a portfolio with limited or no involvement of human beings. Innovative software firms have developed multiple variations of these Roboadvisors with varying focus. ‘Betterment’ provides multiple goal setting support, whereas one of the largest firms ‘Wealthfront’ has built tax harvesting algorithms to optimize portfolios. ‘Jemstep’ can provide advice across the entire portfolio held or managed across multiple firms. Most of the innovation is occurring in venture capital financed software firms and the traditional wealth management firms are responding to the competition with their own services. For example, Vanguard’s new Vanguard Personal Advisor

Services (VPAS) offers both a virtual advisor (like Wealthfront and Betterment) along with a certified human advisor at a comparable price.

Key Enablers:

• Digital technologies, and API Management technologies that automate the entire lifecycle of wealth management

• Data aggregation and analysis technologies such as Big Data and Advanced visualization


About $2-3B assets in management and growing at around 100% CAGR!.

Conclusion

Digital and Big Data are changing the face of financial services with leading-edge banks and non-banks leading the disruptions. Banks should carefully examine their digital and data roadmaps and identify their sweet-spots. For some banks it would be growth with better customer engagement and for others it could be increasing operational excellence and reducing risk and for some it could be new revenue stream through product innovation.

by Paddy Ramanathan

Banks and Credit Unions are facing competition on all fronts, especially from Non-Bank challengers and cutting-edge banks that are putting digital and big data technologies to work. Non-Bank challengers in small business lending, and to some extent consumer lending, wealth management, and payments, are attacking traditionally safe revenue sources. They are delighting customers by making their experience as easy as digital natives; Amazon, Google and Facebook. Cutting-edge banks are boosting revenues, cutting costs and improving customer experience by using digital and big data analytics.

The current era of digital and big data is changing the game driven largely by customer expectations. We see four broad areas of focus:

We will now review the first two categories of how non-bank innovators and leading edge banks are leveraging Mobile, Big Data, Social Media and the Cloud to disrupt traditional financial services and review the economic value potential of the disruption.

Big Data based Credit Decisioning for Small Businesses makes Credit more available.

Non-bank lenders such as OnDeck and, Kabbage have created a platform that can determine the credit-worthiness and future income

potential of the small business borrower by looking at a wide variety of data points to process a loan in real-time online. Lenders cross-analyze business performance data (such as cash flow, customergrowth, depth of transaction volume, shipping data), social media sentiment about the business and other open-data and are able to create forward looking view of creditworthiness that is more effective than traditional (FICO scores; Fair Isaac Corporation scores, credit scores) backward looking credit history. This type of lending is transforming the small business lending space. Borrowers not only prefer this form of lending due to its sheer convenience when

• Since the financial crisis, it has become common place to argue that banks should be run as utilities, not casinos. At least in terms of their financial performance, that seems to be happening. In 2006, the eight American banks that regulators have since labelled “globally systemically important” generated casino-like profits, with returns on equity of 30% on average, according to Oliver Wyman, a consultancy. Extract from the Economist Sep 25, 2014

• Sovereign defaults are common events with many causes. For Argentina, the path to its 2001 default started with the ballooning of its sovereign debt in the 1990s, which occurred alongside neoliberal “Washington Consensus” economic reforms that creditors believed would enrich the country. The experiment failed,

and the country suffered a deep economic and social crisis, with a recession that lasted from 1998 to 2002. By the end, a record-high 57.5% of Argentinians were in poverty, and the unemployment rate skyrocketed to 20.8%. Joseph Stiglitz and Martin Guzman Extract from the Economist, September 27, 2014.

• Goldman Sachs Group Inc. (GS), the top adviser on corporate takeovers, is changing its conflict-of-interest policy to bar investment bankers from trading individual stocks and bonds, a person with direct knowledge of the matter said. They also aren’t allowed to invest in activist or event-driven hedge funds. Michael J. Moore Sep 27, 2014, Extract from Bloomberg News.

NEWSBYTES from Americas

The Q-Factor BFSI

compared to the traditional process of submitting tax records, business plans, etc. This mechanism brings into the credit pool a lot of borrowers who otherwise would not be eligible for credit. The same data based techniques also yield insights to when and which small business needs credit and that can be used for effective targeting and acquisition.

Key Enablers:

• Big Data or the ability to learn, infer and analyze multiple forms of data and predict outcomes with greater accuracy then before, and

• Digital technologies that extend the reach and make the process of getting a loan the same as buying a book on Amazon.


Total loans are about $3B and are growing at CAGR of 100% to 150%. Shifting models in Wealth Management – The advent of the Software based Advisors caters to the new generation of wealth of customers

With the demographic shift of wealth from baby-boomers to Millennials, estimated to have $7T by 2018 compared to $2T in 2013,traditional wealth management models are changing. As information proliferates and technology and decision sciences expand, new models for obtaining advice and managing wealth are emerging. The change is much broader than just new to olsets but represent a fundamental shift in the business model.

We see data and analytics coupled with enhanced visualization substituting the traditional high-touch advisor/client interactions. A software-based model can learn the goals and preferences of a customer and design a portfolio with limited or no involvement of human beings. Innovative software firms have developed multiple variations of these Roboadvisors with varying focus. ‘Betterment’ provides multiple goal setting support, whereas one of the largest firms ‘Wealthfront’ has built tax harvesting algorithms to optimize portfolios. ‘Jemstep’ can provide advice across the entire portfolio held or managed across multiple firms. Most of the innovation is occurring in venture capital financed software firms and the traditional wealth management firms are responding to the competition with their own services. For example, Vanguard’s new Vanguard Personal Advisor

Services (VPAS) offers both a virtual advisor (like Wealthfront and Betterment) along with a certified human advisor at a comparable price.

Key Enablers:

• Digital technologies, and API Management technologies that automate the entire lifecycle of wealth management

• Data aggregation and analysis technologies such as Big Data and Advanced visualization


About $2-3B assets in management and growing at around 100% CAGR!.

Conclusion

Digital and Big Data are changing the face of financial services with leading-edge banks and non-banks leading the disruptions. Banks should carefully examine their digital and data roadmaps and identify their sweet-spots. For some banks it would be growth with better customer engagement and for others it could be increasing operational excellence and reducing risk and for some it could be new revenue stream through product innovation.

Paddy Ramanathan is the Managing Partner at ‘Digital Confluence’ and a Partner with the Bank Solutions Group, based in San Francisco. With tenures with the Bank of America, Webpalm, Wells Fargo and the Silicon Valley Bank, Paddy comes with a proven track record of helping banks and financial firms innovate and embark on technology led business transformation. His expertise Spans Mobile/Internet Strategies, Big Data, Data Analytics, Social Media Integration, SOA/API Infrastructure and Cloud Technology.

An Electrical Engineer from the Indian Institute of Technology Kharagpur, with a passion for improving K12 education through technology, his current focus lies in leveraging information as a strategic asset.

Issue 07 | October 2014 5

Enhanced recommendations came into existence in the form of Basel II in 2004 where apart from credit risk,market risk and operational risk were introduced in the system in the form of the "three pillars" concept of minimum capital requirement, supervisory review and market discipline. Thereafter, on experiencing the global financial crisis in 2008, Basel III was announced in 2010 with the introduction of liquidity risk management in the form of reporting of liquidity ratios like Liquidity Coverage Ratio and Net Stable Funding Ratio.

Insurance and corporate sector regulations

A similar directive for the insurance sector kicked in 2009 in the form of Solvency II norms, primarily for the European Union insurance sector, which has been primarily accepted by insurance regulators globally and sets the parameter for minimum capital requirements in this sector.

These guidelines have a much wider scope as the initial Solvency I guidelines introduced in 1973 were not very effective. Similar to Basel, Solvency II also rests on three pillars: that of quantitative requirements, governance, risk management and effective supervision of insurers and disclosure and transparency requirements. Similarly for the corporate sector, COSO was formed in 1985 primarily to provide a unified risk management and reporting framework in the form of Enterprise Risk Management (ERM). The five framework components of COSO include control environment, risk assessment, control activities, information and communication and monitoring.

Four categories of business objectives within enterprise risk management framework are strategic, operational, reporting and compliance. COSO ERM framework was later extended to eight components of internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication and monitoring. The pitfalls

One also needs to be cognizant of the fact that unified risk management and reporting has its pitfalls as well. Just by having a unified risk management and reporting framework would not solve all

issues. We have witnessed even Basel compliant banks failing like Northern Rock in UK. Also various countries have different regulatory requirements. For example certain percentage of the Indian banks investments going into earmarked sovereign papers or government guaranteed securities in the form of Statutory Liquidity Ratio requirement which is somewhat unique to the Indian banking industry, which emphasizes the fact that often one size doesn’t fit all and one cannot have the same yardsticks for measurement.

The way forward

Though some initiatives have already been made to provide a unified risk management and reporting framework globally for various types of organizations, much more needs to be done to provide an absolute level playing field for all organizations in the world! This is easier said than done due to the different types of regulations prevalent in different countries with different types of economies, governance, taxation, etc. Only if all countries of the world come together to adopt a common approach to risk management and reporting,can a truly unified framework evolve and people like my friend would sigh in relief in being able to ascertain, analyze and decide on their own for organizations in various sectors in the world.

Sanjoy Choudhury based in Mumbai, is Principal – Radiant Consulting and Spearheadsits Treasury, Risk, Training and Research Business Globally. With over 20 years in the Banking & Financial Services Industry, his experience cuts across the ICICI Bank, GlobeOp Financial Services, the CNBC Network18 Group, Cogencis Information Services Ltd and Bespoke Consulting Solutions.

An MBA from the University of Calcutta and an accredited Financial Risk Manager from the Global Association of Risk Professionals, Sanjoy is a multi-skilled OTC Derivatives and Financial Risk professional.

• The head of Employees' Provident Fund Organisation (EPFO), says it has "no option" but to change its rules and put money into riskier investments by buying stocks for the first time to seek higher returns. KK Jalan, Chief of the EPFO, said that to get better returns, the fund with about $125 billion in assets needs to diversify investments, the bulk of which are in government debt. "The way our fund size is increasing, and the way it is bound to increase, there is no other option," Jalan told media in an interview. Prime Minister Narendra Modi's government also wants the 80 million-member EPFO, the world's ninth largest by assets in 2012, to invest in stocks, which could support buoyant Indian markets. Extract from PTI, September 17 ,2014.

• Five associated banks of State Bank of India would raise about Rs 33,000 crore capital, to meet global risk norms – Basel 111 – in next 5 years: Extract from Deccan Herald, September 22, 2014.

• The former Macquarie Group banker and head of property Bill Moss says Australian homes are becoming a global commodity, arguing any moves by regulators will do little to stem the wave of offshore buyers pushing capital city prices closer to those in international gateway cities. “This is the first (property) cycle we’ve seen where there’s a deregulated global market, where capital is free to flow from Asia to Australia. “We have a free floating dollar, equity makers are global and now our residential markets are going the same way.” Extract from The Australian, September 27, 2014.

NEWSBYTES from Asia, Asia-Pacific

by Sanjoy Choudhury

One of my friends who happens to be a global fund manager at Wall Street recently started managing a large cap global banking fund and asked me to rank three of the world's largest banks headquartered across various parts of the world in terms of their risk profile; J P Morgan Chase in New York, HSBC in London and Mitsubishi UFJ in Tokyo. Without being perturbed, my reply was that as far as soundness of a bank is concerned one may go for a Capital Adequacy Ratio (CAR) analysis and on that count HSBC stands first with CAR of 16.1%, Mitsubishi UFJ comes second at 15.5% and J P Morgan comes across as a distant third at 14.3%. CAR is the ratio of total Capital to

its assets. The rankings were not so important but the fact that I could so convincingly rank them in that order was important. This would not have been possible if there wasn't any unified risk management and reporting concepts in the banking sector globally -- a la Basel III norms for capital adequacy.

Uniformity in various sectors

Not only for the banking sector but globally similar norms are being laid down for other sectors as well. Solvency II norms for insurance

and a COSO (Committee of Sponsoring Organizations) framework for corporate are examples.

Risk is uncertainty and managing this uncertainty is the cornerstone of risk management. Risk is prevalent in all spheres of life and for all types of organizations like banks, insurance companies and corporates. Risk management techniques for different types of organizations are different but the basic building blocks are the same. Thus a unified risk management and reporting approach globally should go a long way in arriving at a common yardstick for measurement, analysis and management of risk for various organizations located in different parts of the world. Some path breaking work on this front has already been started but much more needs to be done to achieve the end result of absolute uniformity. The hindrances are many because there are different regulators in various geographies who have their own set of regulatory requirements which make the yardsticks non-uniform across the globe.

Global norms for banking

The case for unified risk management and reporting in the banking sector is much more relevant, focused and evident since the banking sector globally is much more interrelated and has a much greater effect on the global economy on a collective basis because of increased global trade and commerce involving exports and imports between various countries.

As a requirement for global recommendations of regulations and a level playing field in the banking sector, particularly pertaining to risk management, the Basel Accord came into existence in 1988 which primarily focused on credit risk. It provided the basic uniform framework as to how much minimum capital needs to be deployed for a bank to be in business and how it needs to be computed with a uniformity in the way the financial ratios need to be computed across the entire banking industry. Though banks have to follow the regulations prescribed by their respective country's central bank regulations, by and large, the Basel Committee's recommendations are presently being followed by most countries.

Unified Risk Management and Reporting

The Q-Factor BFSI6 Issue 07 | October 2014

The Q-Factor BFSI 7

Enhanced recommendations came into existence in the form of Basel II in 2004 where apart from credit risk,market risk and operational risk were introduced in the system in the form of the "three pillars" concept of minimum capital requirement, supervisory review and market discipline. Thereafter, on experiencing the global financial crisis in 2008, Basel III was announced in 2010 with the introduction of liquidity risk management in the form of reporting of liquidity ratios like Liquidity Coverage Ratio and Net Stable Funding Ratio.

Insurance and corporate sector regulations

A similar directive for the insurance sector kicked in 2009 in the form of Solvency II norms, primarily for the European Union insurance sector, which has been primarily accepted by insurance regulators globally and sets the parameter for minimum capital requirements in this sector.

These guidelines have a much wider scope as the initial Solvency I guidelines introduced in 1973 were not very effective. Similar to Basel, Solvency II also rests on three pillars: that of quantitative requirements, governance, risk management and effective supervision of insurers and disclosure and transparency requirements. Similarly for the corporate sector, COSO was formed in 1985 primarily to provide a unified risk management and reporting framework in the form of Enterprise Risk Management (ERM). The five framework components of COSO include control environment, risk assessment, control activities, information and communication and monitoring.

Four categories of business objectives within enterprise risk management framework are strategic, operational, reporting and compliance. COSO ERM framework was later extended to eight components of internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication and monitoring. The pitfalls

One also needs to be cognizant of the fact that unified risk management and reporting has its pitfalls as well. Just by having a unified risk management and reporting framework would not solve all

issues. We have witnessed even Basel compliant banks failing like Northern Rock in UK. Also various countries have different regulatory requirements. For example certain percentage of the Indian banks investments going into earmarked sovereign papers or government guaranteed securities in the form of Statutory Liquidity Ratio requirement which is somewhat unique to the Indian banking industry, which emphasizes the fact that often one size doesn’t fit all and one cannot have the same yardsticks for measurement.

The way forward

Though some initiatives have already been made to provide a unified risk management and reporting framework globally for various types of organizations, much more needs to be done to provide an absolute level playing field for all organizations in the world! This is easier said than done due to the different types of regulations prevalent in different countries with different types of economies, governance, taxation, etc. Only if all countries of the world come together to adopt a common approach to risk management and reporting,can a truly unified framework evolve and people like my friend would sigh in relief in being able to ascertain, analyze and decide on their own for organizations in various sectors in the world.

Sanjoy Choudhury based in Mumbai, is Principal – Radiant Consulting and Spearheadsits Treasury, Risk, Training and Research Business Globally. With over 20 years in the Banking & Financial Services Industry, his experience cuts across the ICICI Bank, GlobeOp Financial Services, the CNBC Network18 Group, Cogencis Information Services Ltd and Bespoke Consulting Solutions.

An MBA from the University of Calcutta and an accredited Financial Risk Manager from the Global Association of Risk Professionals, Sanjoy is a multi-skilled OTC Derivatives and Financial Risk professional.

by R RamakrishnanAssociate Vice President (Delivery Services): SQS BFSI

We live in an emerging mobile world where everything, including people and organizations, will soon be interconnected. Mobile devices are becoming indispensable tools to communicate, bank, shop, socialize and organize our daily lives. Banks like many others are wide awake to the changing environment and the forecast is that 50% of all transactions would be conducted on mobile devices by 2017. “Remember, with great power, comes great responsibility”, so said the Spiderman from outside his web. The countless opportunities to grow business through mobile channels impose a huge responsibility on banks to provide stable, defect free applications to ensure a satisfying and delightful customer experience.

Mobile applications are to be kept working consistently across the innumerous types of mobile devices and frequent upgrades of their Operating Systems (OS). Multiple Carriers, Multiple Languages, different Wi-fi routers and the permutations and combinations across all of them tend to queer the pitch.

The Rapid Application Development (RAD) methodology is what is popularly used for mobile application development. It is very difficult to address all possible combinations in the short time period associated with RAD. Therefore, depending on the customer profile of a bank, an optimum combination of devices viz-viz a browser is to be selected.

The applications to be tested could be downloaded from an iOS, Android store or the Mobile Web, where they could be viewed under

Different facets of Mobile testing


by Sanjoy Choudhury

One of my friends who happens to be a global fund manager at Wall Street recently started managing a large cap global banking fund and asked me to rank three of the world's largest banks headquartered across various parts of the world in terms of their risk profile; J P Morgan Chase in New York, HSBC in London and Mitsubishi UFJ in Tokyo. Without being perturbed, my reply was that as far as soundness of a bank is concerned one may go for a Capital Adequacy Ratio (CAR) analysis and on that count HSBC stands first with CAR of 16.1%, Mitsubishi UFJ comes second at 15.5% and J P Morgan comes across as a distant third at 14.3%. CAR is the ratio of total Capital to

its assets. The rankings were not so important but the fact that I could so convincingly rank them in that order was important. This would not have been possible if there wasn't any unified risk management and reporting concepts in the banking sector globally -- a la Basel III norms for capital adequacy.

Uniformity in various sectors

Not only for the banking sector but globally similar norms are being laid down for other sectors as well. Solvency II norms for insurance

and a COSO (Committee of Sponsoring Organizations) framework for corporate are examples.

Risk is uncertainty and managing this uncertainty is the cornerstone of risk management. Risk is prevalent in all spheres of life and for all types of organizations like banks, insurance companies and corporates. Risk management techniques for different types of organizations are different but the basic building blocks are the same. Thus a unified risk management and reporting approach globally should go a long way in arriving at a common yardstick for measurement, analysis and management of risk for various organizations located in different parts of the world. Some path breaking work on this front has already been started but much more needs to be done to achieve the end result of absolute uniformity. The hindrances are many because there are different regulators in various geographies who have their own set of regulatory requirements which make the yardsticks non-uniform across the globe.

Global norms for banking

The case for unified risk management and reporting in the banking sector is much more relevant, focused and evident since the banking sector globally is much more interrelated and has a much greater effect on the global economy on a collective basis because of increased global trade and commerce involving exports and imports between various countries.

As a requirement for global recommendations of regulations and a level playing field in the banking sector, particularly pertaining to risk management, the Basel Accord came into existence in 1988 which primarily focused on credit risk. It provided the basic uniform framework as to how much minimum capital needs to be deployed for a bank to be in business and how it needs to be computed with a uniformity in the way the financial ratios need to be computed across the entire banking industry. Though banks have to follow the regulations prescribed by their respective country's central bank regulations, by and large, the Basel Committee's recommendations are presently being followed by most countries.

mobile browsers such as Safari, Android or Chrome. So also the testing with traditional SMS and USSD (Unstructured Supplementary Service Data) query features to be considered – e.g. *101# to query the account balance.

Manual testing is not the answer for end-to-end mobility testing as the tests need to be run on multiple configurations involving devices, OS versions, browsers, languages, carriers etc. It is difficult for manual testing to cope with the short duration of test cycles. Therefore, a comprehensive automated approach is the way forward.

In automating the tests, tools like ‘Seetest’ provide cost effective adaptors to connect to popular automation tools like UFT, RFT, Selenium, MS TFS etc. The tester can then access and initiate various actions on the mobile device, which is connected to a remote machine

at a different location. This also helps testing services under an onsite-offshore model. Available tools also help in capturing the automation script on one platform and then running them on others.

Mobile testing is different in that it goes beyond the testing of functionalities. The following dimensions are to be accommodated:

• Usability, Visibility, Navigation and Verification under online and offline modes, User Friendly messages, Ease of Installations and Upgrades, Consistency of data across other channels like ATM, IVR, Internet etc.

• Compatibility across

• Myriad mobile handsets and Tablets running on different OS platforms (iOS, Android, Windows)

• Multiple versions of OS platforms (iOS 6.1.6, 7.1.2, 8.0, Android 4.2, 4.3, 4.4 etc)

• Compliance standards set by Apple and Android platforms

• Compatibility of the app undermobile web across multiple browser combinations

• Working of the app under different network types – 2G, 3G, 4G, Wi-fi; Server connection changes from 2G/3G to Wi-fi when user walks into a Wi-fi zone

• Interoperability testing – Back up of information in the app, recovery plan in the instances of low battery, instances of app upgrades, how app behaves during interruptions like call, message, reminders, alarm, etc.

• Performance testing both on the server side,i.e., impact on CPU usage, memory, number of users, bandwidth, latency etc., as well as on the device side,.i.e., Response time, CPU usage, memory usage, Frame rendering, Battery consumption, etc.

• Security testing – Prevention of hacking of info residing in the mobile, handling & managing malicious content, encryption and decryption for data exchanges, etc

Test-automation could be highly beneficial. However, the constant introduction of new devices, frequent updates to OS and browsers, continual enhancements in functionality offering newer services and better customer experiences, imposes a need to continually update the automation pack.

The applications also needs to be tested proactively for various forthcoming operating system upgrades - may be a Beta version -even before they hit the market. This would ensure that the current applications continue to work very well when customers upgrade their firmware. Testers should identify the new features or changes, which impact the current applications and create tests to validate them. The consequences of failure of a bank’s mobile channel could significantly lower customer satisfaction levels that never get reported to the Bank. A very robust and sustained testing approach will ensure a successful mobile channel roll out and its satisfactory continuance.






• The world's three economic superpowers - the U.S., China and Europe - are heading for a major collapse in asset values because their economic models favor consumption instead of productivity, said Steve Jakobsen, Chief Economist at Saxo Bank (the on-line Danish Investment Bank), on CNBC on September 26, 2014

• The European Central Bank would be prepared to enact more stimulus measures if necessary to increase liquidity in the euro area, ECB Governing Council Member Luc Coene said. He held out the possibility that the targeted-loan program that the ECB announced in June wouldn’t be adequate to spur lending and stimulate the economy of the 18-nation euro area. “If we estimate that it’s insufficient, inevitably we will add other instruments at our disposal to increase the balance sheet of the Central Bank, if it’s

necessary,” Coene told a conference yesterday at Cercle de Lorraine in Brussels. Ian Wishart Sep 27, 2014. Extract from Bloomberg News

• European Governments need to "boost demand" in order to reduce unemployment and avoid deflation, the US Treasury Secretary has told the G20 Group. ---- Speaking after the meeting of G20 Finance Ministers and Central Bank Governors in Australia on Sunday (21 September), Treasury Secretary Jack Lew said that there was "an intensified call for boosting domestic demand in Europe". He added that EU Governments needed to combine short-term stimulus measures with structural reforms to their economies. Benjamin Fox, in EU Reporter, September 22, 2014

NEWSBYTES from Europe





The Q-Factor BFSI8

Platfrom

Testing using emulators

Manual testing using physical devices

Cloud based testing solution

Automated solution using physical devices

Pros

• No investment in physical devices• Emulators mostly available for free

• Most realistic view of test results• User experience can be simulated for different scenarios• Remote access for offshore testing

• Most realistic view of test results• User experience can be simulated for different scenarios• Remote access for offshore testing

• Most realistic view of test results• User experience can be simulated for different scenarios• Remote access for offshore testing• Scripts can be batched to run on multiple devices connected to a desktop• No security threat as the devices are within the secured connectivity

Cons

• No guarantee that it will work on physical devices considering various form factors• Useful for initial round of testing only

• Procurement cost of devices• Restrictions in testing multiple configurations due to shorter test cycles• Performance & Security testing cannot be performed

• Cloud solution cost is still high• Devices are available for testing only during a prescribed window• Security risks in exposing the bank data

• Procurement cost of devices (can be mitigated by leveraging the Mobile Test lab of testing provider)

The Mobile testing platforms – the Pros & Cons





































The Q-Factor BFSI 9

• Home Depot Inc. said a data breach between April and September put about 56 million payment cards at risk, signaling that the hacker attack was bigger than the one that struck Target Corp. last year. -The hackers used custom-made software to evade detection, relying on tools that haven’t been seen in previous attacks, Atlanta-based Home Depot said today in a statement. The company began investigating the breach on Sept. 2, immediately after banking partners and law enforcement raised alarms that its systems may have been infiltrated. Matt Townsend, September 19, 2014. Extract from Bloomberg News

• The vast potential of cellular technology in future banking growth is evident from the fact that mobile banking-based transaction costs about 2 per cent of the branch banking cost, 10 per cent of ATM-based transaction cost and 50 per cent of Internet banking cost. ‘A paradigm shaper’: Soumya Kanti Ghosh, Deccan Herald, Sep 22, 2014

• Bitcoin values may be languishing at the $400 mark, but financial services interest in the crypto-currency shows no signs of abating, with two of the biggest shows in the banking calendar - Sibos and Money 20/20 - devoting significant airtime to the technology. Extract from Finextra September 27, 2014

NEWSBYTES Technology and Markets


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Issue 07 | October 2014The Q-Factor BFSI10

Disclaimer: All the documentation and other material contained herein is the property of SQS India BFSI Ltd., and all intellectual property rights in and to the same are owned by SQS India BFSI Ltd. You shall not, unless previously authorized by SQS India BFSI Ltd., in writing, copy, reproduce, market, license, lease or in any other way, dispose of, or utilize for profit, or exercise any ownership rights over the same. In no event, unless required by applicable law or agreed to in writing, shall SQS India BFSI Ltd., or any person be liable for any loss, expense or damage, of any type or nature arising out of the use of, or inability to use any material contained herein. Any such material is provided “as is”, without warranty of any type or nature, either express or implied. All names, logos are used for identification purposes only and are trademarks or registered trademarks of their respective companies. Wholesale Banking, Transaction Banking and the Financial Institutions divisions, covering UAE, Qatar and Oman. In 2000 he moved to Sri Lanka as Country Manager and in 2001 to Singapore as Regional Sales Head Transaction Banking covering Cash Management and Trade for Asia Pacific and Middle East.

SQS – the world’s leading specialist in software quality

QUIZ October, 2014

Q 1 In Kenya 70% of transactions are conducted through M-Pesa. What sort of risk does it not threaten since the value of such transactions constitute only 2.3% of all transactions?

Q 2 What is the term coined to refer to the Asian debt crisis of the late 1990s?

Q 3 US-based risk analytics outfit Context Relevant has completed $13.5 million in Series B-1 funding and signed strategic partnerships with three firms. Two of them are Bank of America and Merrill Lynch. Which is the third?

Q 4 Already working with Twitter, which is the start-up that has been named as the payments power behind Facebook's new 'buy' button?

Q 5 The Global Findex (2012) shows that 20.5% of the Peruvian population aged over 15 has a bank account. This is far below the 42.2% in Chile and below the more than 55.9% in Brazil. What is the percentage of adults in India who have a bank account?

Q 6 What is the overdraft facility provided to a bank account under the Indian Prime Minister’s financial inclusion scheme known as PMJDY?

Q 7 According to The European Central Bank (ECB) what is the value of total assets that Eurozone banks, or groups of banks, should exceed to be classed as significant under the framework, the ECB has confirmed?

a. Credit b. Country c. Reputational d. Systematic

a. Bangkok Agenda b. Minsky Moment c. Shanghai Protocol d. We Lin Charter

a. Goldman Sachs b. JP Morgan c. UBS d. Wells Fargo

a. Facetime b. Skype c. Skybot d. Stripe

a. 28 b. 38 c. 48 d. 58

a. Rs 2,000 b. Rs 5,000 c. Rs 10,000 d. Rs 15,000

a. €10 billion b. €20 billion c. €30 billion d. €40 billion

Please visit http://www.sqs-bfsi.com/about-sqs/quiz-2014.php take the quiz.

Note: Register and tick or enter the answer inthe assigned box.

Seven entries with best responses will bechosen as per a lottery draw and USD 100 will be donated to the chosen charity of each winner. Last date for responses – 30th November 2014

Winners will be communicated by email.

Answers for July 2014 Quiz

1. 5% is the minimum Tier 1 common ratio

2. $15,200 is the average indebted household credit card debt in USA

3. India had the highest addition of mobile subscribers

4. Capital adequacy is the parameter for a quantitative assessment

5. Istisna allows cash payment in advance

6. Messaging function was launched to exchange information

7. Emulation is better of the mobile testing methods

Website: www.sqs-bfsi.com; Email: [email protected]