Risk management weaknesses at finance firms persist - EIU survey

Many of the flaws in risk management at banks and insurers that precipitated the global financial crisis remain unaddressed even as new dangers have emerged, according to research from the Economist Intelligence Unit.

The report, sponsored by SAS and based on a survey of 346 financial sector risk managers, reveals that most have made significant progress since the crisis to strengthen their risk capabilities.

Discussions about risk have become a key part of the boardroom agenda, chief risk officers now have a prominent seat at the top table and there is renewed zeal for instilling a greater awareness of principles in the front office, the so-called first line of defence.

However, inadequacies in expertise, data quality and processes remain a worry. The enthusiasm for a large-scale overhaul of risk management has created personnel shortages as firms and regulators scramble to acquire suitable expertise.

Around 40% of respondents says they do not conduct regular updates or have a clear risk strategy in place. Meanwhile, less than one-half of respondents are confident that they understand the interaction of risks across business lines, and poor communication between departments is seen as a key barrier to effective risk management.

In addition, the focus on regulatory compliance could distract attention from emerging risks, says the report. Respondents to the survey highlight uncertainty over future regulation as the main barrier to effective risk management. There is a danger that the focus on compliance could be crowding out day-to-day risk management.

Risk managers recognize that data quality and availability need to improve but collecting, storing and aggregating data is an area of weakness for many firms, with only 39% of respondents believing that they are effective at these activities.

Abhik Sen, report editor, says: "When it comes to managing risk, banks and insurers are clearly keen to raise their game. But the research shows that improvements have not yet gone far enough to reassure everyone about their capacity to protect themselves and others from a catastrophe like the financial crisis."

The global recession appears to have sparked a spending splurge, with the top 100 financial institutions set to spend over $100 billion a year implementing risk governance frameworks by 2012 - more than double the 2006 figure - according to recent research from business advisory firm Deloitte.

Using IBAN and BIC in SEPA Credit Transfers - Public Consultation Online

The European Payments Council (EPC) Customer Stakeholder Forum (CSF) representing the EPC and customer organizations acting on a European level have prepared a set of questionnaires to investigate the actual experience of users inputting the IBAN and the BIC. This has been a response to suggestions that some bank customers may have problems using these two identifiers when initiating SEPA Credit Transfers.

To this end, two online questionnaires have been prepared, one for individual users and another for business users. Users are asked to respond online to the survey published in English. As it is important to get as many responses as possible, translations have been provided for a number of languages - see below under related files.

The questionnaires will be available for a two-month period beginning 3 May 2010 and ending 5 July 2010.

You can access the questionnaires please CLICK HERE

Remittances – Do you need information?

One of the biggest problems in the Remittance industry is the availability of accurate information.

The World Bank operates a website that provides data on the cost of sending and receiving Remittances from one country to another. Called remittances, these international transfers are often initiated by migrant workers. The site covers 178 "country corridors" worldwide. The corridors studied flow from 24 major remittance sending countries to 85 receiving countries, representing more than 60% of total remittances to developing countries.

Pay the website a visit. It’s certainly worth it. You can find it at http://remittanceprices.worldbank.org/

New US Mobile Payment System

A Silicon Valley company has created a mobile payment system called FaceCash that it hopes will one day displace credit cards.

Here’s how it works: You can download the FaceCash application on any leading smartphone — it will be available on iPhone, BlackBerry or Android phones beginning next week. Then you type in your bank account information, Social Security number, and driver’s licence number, and upload your picture. That’s it. You can now use your phone to make pretty much any in-person transaction, whether at a restaurant or at a grocery store — as long as the merchant has signed up for the service. To accept your payment, the merchant simply scans the FaceCash barcode on your phone with a scanner, and your picture will pop up on their computer screen — which helps them avoid fraud. They then approve your payment.

FaceCash has a tough road ahead of it in the short term, because it needs to sign up lots of customers and merchants before it can be useful to either side. On the flip side, if it devises some smart marketing tactics, and cuts deals with banks so that it can become a credit instrument as well as a debit card, this company has a very nice chance. And we should wish it well, because it offers a more open, useful, and inexpensive technology than the gouging credit card companies.

A working ATM - in Lego

An American man has built a working cash machine out of Lego, tapping the toy firm's NXT programmable robotics kit.The ATM - made entirely from Lego and a HiTechnic IRLink and Codatex RFID sensor - can be used for cash withdrawals and to make change, dispensing notes and coins.

It includes a fully functional numeric keypad, a banknote scanner that can be calibrated to accept any currency and a note separator.

The 22 pound machine took Ron McRae four months to build and program, incorporating around 8000 pieces and 1800 lines of NXC code.

Financial Innovation, Technology, Regulation and Public Policy

As the recent financial crisis begins to fade from memory we are starting to see behaviors in the world of financial innovation reverting to old methods and practices. Is it a good thing? Perhaps…

However, misunderstood financial innovations such as securitization, which led to the financial crisis through the sub-prime debacle in the United States, pose an ever present danger to the financial industry. Regulators and supervisors everywhere, as guardians of the various components of the world’s financial system, do still not clearly understand the implications of financial innovation. Often too this is clouded by public policies which as the basis for such oversight are suspect as to which “public” they are intended to benefit. This is especially the case in the uses of technology in the provision of financial services.
The word “innovate” means to bring in novelties or to make changes. Financial innovation extends this simple definition to the financial world. However, here the simplicity ends with a plethora of products, processes and methods that have been applied to the spectrum of the financial world – some good and some bad.

What drives financial innovation? Simply put – self interest, which finds expression through Adam Smith’s “invisible hand”. Financial institutions seek out, through the innovative process, the most efficient cost effective way to maximise their profits either on existing products or potential new ones.

There are two basic drivers of financial innovation which result from the barriers that a bank faces in reaching its financial goals – competition and regulation. To beat these barriers banks engage in completion of two sorts – competitive or circumventive. The first is pretty obvious as all banks seek to maximise their profits and they do this by competing with other players in the market.

The second, circumventive, is a little bit more obscure. In all jurisdictions financial firms are faced by a plethora of rules and regulations, imposed by the banking and regulatory authorities on how they conduct their business. These are the regulatory barriers that a bank faces. These barriers may often be overcome by innovation – hence the term “circumventive innovation”.

The classic illustration of this is the development of the humble Automated Telling Machine (ATM) which was introduced first in the United States as a circumventive innovation, to get past retractions on branch banking. The idea was quickly picked up, first in Europe, and then globally as a competitive innovation.  European banks had no restrictions on the number of branches they could have but labour policies created limitations on for example working hours among many other issues.  In the ATM the European banks found a new “staff member” who (1) was cheaper than a human teller, (2) could work all day and night, (3) was accurate, (4) did not need a physical branch to support it. There were many other plusses a well, not to mention the ability to widely expand the range of products and services that could be offered.

In essence, one type of innovation (circumventive) morphed into another (competitive). This interaction goes on constantly and is a key feature of the dynamics of a constantly evolving financial system. And technology has been a leading driver of this process. We see this in action all the time in many different ways.

Recently I came across a news item that indicated that Citibank had embarked on a project to make deep inroads to consumer banking in India – a vast market. Notwithstanding the size of the market in India, which is on a par with that of China, anyone trying to establish or expand their business in the world’s largest democracy has a massive hurdle to overcome. For a bank one of these hurdles is very tight regulation and the restrictions placed on banks in growing their branch networks.
The Reserve Bank of India, which is the country’s central bank, tightly controls the number of new branch licenses that are granted to foreign banks. This has a massive restrictive affect on the ability of such banks to grow their distribution networks.

To get past this limit on its physical presence Citibank has begun targeting India’s almost six hundred million mobile users. Now this is the “circumventive innovation” that I spoke of.

Citibank, who is one of the leading foreign banks in India with 42 branches and more than 450 ATMs – recently completed a six-month program in Bangalore to test the appetite of customers to make transactions through phones. The program was called the “Tap and Pay” pilot project.

During the project, the bank sold more than 3,000 phones especially enabled to make transactions over the mobile network. Customers made Rs26m (US$585,000) of purchases from 250 merchants. Citibank is now considering rolling out such services to its wider client base.

This case is a classic illustration of how financial innovations can be used an adapted to achieve other needs.

So, what is the message to bank regulators, supervisors and their policy makers? Well put simply “financial innovation or its implications are not always clearly understood”. These facts are critical to bank supervisors and regulators because innovative actions on behalf of the financial industry are not always benign or made for the general good. Equally so, public policy makers need to understand why some financial innovations take place and review their policies in the light of this. Very often restrictive practices are created for the wrong reasons – protection against genuine competition is often disguised as consumer protection.  

Teaching Banking to Kids

Commonwealth Bank of Australia recently launched Coinland, a fascinating virtual online game for junior school children to learn about money management and banking.
Mark Murray, general manager consumer marketing at CBA says Coinland creates a virtual world where children can have fun while starting to build their knowledge about money.

"The once simple lessons of personal finance have grown more complex, and the ways children learn has evolved," he says. "Coinland teaches children in a format they can easily relate to and have fun along the way."

Children create a personalized avatar which represents them in the game, alongside their guide Platy, who shows them how their actions impact their savings goals. The Bank's saving super heroes, the Dollarmites interact with players to bring money management to life. They also meet Mr. Save-a-lot who teaches children about money, while Gobbler - Platy's nemesis - entices them to spend.

Players develop their money management skills through a series of challenges and games, visiting eight different zones with the aim for each player to earn and save coins.

The site also offers social media tools, so that children can connect with friends by adding other players to their buddy list via safe chat using pre-defined messages.