Operational Risk - Computer-based trading under scrutiny after Dow dive

US regulators are scrambling to deal with the aftermath of a wild day of trading on the Dow Jones Industrial Average which shipped more than 600 points in seven minutes before the close of trading in New York on Friday.

The sickening lurch in the Dow caused scenes of chaos in US markets as computer-based programs kicked in and exchanges and currency markets struggled to handle an unprecedented surge in volumes.

The panic spilled over into other markets as investors fled for the safety of government bonds causing yields to drop and pushing the dollar sharply higher.

US regulators are undertaking a forensic investigation of the day's trading in an effort to pinpoint the cause of the collapse as exchanges move to cancel obviously erroneous trades.

Nasdaq issued a statement saying it would cancel all trades executed between 14:40:00 and 15:00:00 that showed a 60% swing in price during the peak trading period.

"There is no indication at this time that a Nasdaq market participant experienced a technological failure in connection with this event," the statement continued.

The Chicago Mercantile Exchange also felt moved to responded to rumors concerning irregular trades by Citigroup in stock index futures: "While our policy is not to comment on individual participation in our markets, in light of volatile market conditions, CME Group confirmed that activity by Citigroup Global Markets Inc. in CME Group stock index futures markets does not appear to be irregular or unusual in light of market activity today."

Whatever the cause, the freefall in the markets will stoke up regulatory concerns about the role played by high frequency traders and automated trading programs in the ensuing market meltdown.

Giles Nelson, chief technology strategist of Progress Software, gives the vendor perspective: "Unfiltered access to trading destinations can end up causing trading errors or even a 1,000 point crash on the Dow Jones Industrial Average. This is why pre-trade risk management tools are absolutely essential - to monitor position limits, trading limits and to catch fat fingered errors before they happen. Banks and regulators must act to stop this happening. It is completely avoidable."

Remittances - National Bank of Pakistan signs deals with 2 Saudi banks

The National Bank of Pakistan (NBP) has signed deals with two Saudi banks for remitting money to Pakistan.

The launch of remittance facilities by Al-Rajhi Bank's Tahweel Al-Rajhi and Bank Albilad's Injaz is expected to start later this week, said Khalid Bin Shaheen, NBP's senior executive vice president, who was in Jeddah recently to oversee the arrangements.

So far NBP, Pakistan's largest commercial bank, has had such an agreement with Samba Financial Group.

Shaheen said the new deals were likely to boost remittances to Pakistan, which in recent months have recorded remarkable growth in money received from its overseas nationals.

According to the latest figures released by the State Bank of Pakistan, the nation's central bank, home remittances in March was $763 million, a growth of 30 percent over what was received in February. Similarly, in the nine-month period ending in March, remittances were up 28 percent over the corresponding period of last year.

March remittances from Saudi Arabia also reflected the global trend. Pakistan received $193.91 million from Saudi Arabia, which was $44.46 million or 30 percent more over February figure.

Shaheen said the credit for the growth goes to the structural changes that have taken place following the launch of Pakistan Remittance Initiative (PRI) in August 2009. PRI, a joint venture of the Ministry of Finance, Ministry for Overseas Pakistanis and the State Bank, is an effort to increase the flow of remittances through official channels.

Along with PRI, the State Bank has launched Real Time Gross Settlement (RTGS), which has drastically reduced the time it takes for funds to be settled between the many banks in Pakistan.

Shaheen said the deals with Al-Rajhi and Bank Albilad as well as Samba ensure free of cost cash to cash transfer through large number of NBP branches in Pakistan. "No account is required for this service. Payment will be made on proper identification," he said.

Instant electronic transfer from account to account is also free of charge. NBP has reduced the requirement of minimum balance of Rs.3,000 unlike other banks which have set the limit at Rs.10,000.

Remittances - Money transfer firms target mobile services

The shifting fortunes in the money transfer market are pushing traditional agents such as Western Union and MoneyGram to develop mobile solutions, which they are relying on to recapture a share of the local market.

Hit by declining market share following the advent of mobile money services, the two operators have had to change strategy as they move to defend their core business.

“If it’s a remittance transaction, we want to touch it, whether online, by phone or at one of our global agent locations. There will be more opportunities ahead for mobile transfers and more transfers direct to cards,” said Thomas Christophersen, MoneyGram’s head of new product and channel development.

According to data from Financial Service Deepening (FSD), traditional money transfer operators have lost significant market share since the advent of mobile money services such as M-Pesa and Zap.

Their market share in Kenya has fallen to just three per cent of the total transfer market, down from a tenth of the total transfers market in 2007.

FSD says that the proportion of people using the service stood at 17 per cent before mobile money transfer commenced, a figure that has dropped as the telecommunications firms continue to eat into a larger share of the money transfer market.

In 2009 MoneyGram moved to double its agent locations in Kenya while Western Union implemented a lower tariff structure as they both attempted to fend off rising competition from mobile operators by adding PostBank’s branches to its agent network.

Many users cite the high cost of transferring money using operators such as MoneyGram and Western Union as a barrier to access, preferring the lower rates offered by mobile service providers.

World Bank estimates indicate that reducing remittance commission charges by just two to five per cent could increase the flow of formal remittances by 50-70 per cent, which would boost local economies.

Reducing the cost of sending each individual remittance encourages the delivery of lower value remittances, says the World Bank, at values far less than today’s average transfer of $200.

Previous data from Safaricom and Zain indicate that most Kenyans who use the service typically send smaller amounts, ranging between Sh1,000 and Sh2,500 at an average cost of Sh55.

In December, MoneyGram joined forces with SMART Communications, to kick off the pilot phase of its MoneyGram mobile money transfer service that allows delivery funds from any MoneyGram agent location direct to any SMART Money account.

For its part, Western Union has formed partnerships with mobile firms aimed at defending its share of the international remittances market, said to be worth US$300 billion.

The two operators will have to fight off a growing number of mobile service providers who have found that offering financial services through mobile handsets can add to the attractiveness of mobile money services, and help to retain customers to networks.

Rohit Bhatia, CEO of Seamless, a Swedish software company specialized in solutions for Mobile Money, prepaid e-Top Up, and Value Added Services, says the lack of basic services like banking and fixed internet, high growth markets will use the mobile phone as the main service enabler, especially for functional services like remittances, purchases and payments.

“Our research shows a major interest for such functional services in emerging markets, and this will drive innovation. These low ARPU (average revenue per user) markets’ and low income segments will adopt new functional services faster than the global average.

MNOs (mobile network operators) that recognize mobile money as a growth potential and a differentiator will emerge winners,” said Mr. Bhatia.

Players in the financial sector and mobile industry view mobile money as a fast, easy and new way for the un-banked to carry out their everyday money transactions.

“If MNOs can leverage existing airtime distribution networks, keep their proposition to stakeholders simple and yet innovative, expand slowly and steadily, simplify registration and subscription to the service, and above all, select a long-term business partner as their technology vendor, they are sure to be winners in the mobile money space,” said Mr Bhatia.

Mobile banking – Cheque deposit anyone?

Traditional bankers' hours aren't too convenient if you've got a cheque to deposit at night or on a weekend. But now, there's an app for that.

Digital Federal Credit Union (DCU) is among a small number of US banking institutions to launch a mobile deposit system, Mobile PC Deposit, where members can take a photo of a cheque and deposit it securely using an Apple iPhone or Google Android mobile device, DCU officials said this week.

"This is huge," said Denise Gonthier, DCU's administrative services manager. "It's a very tech-savvy world out there, and we want to give members what they want. They can now deposit a cheque from anywhere, at any time."

DCU with branches in Massachusetts and New Hampshire, worked with Vertifi Software LLC to develop the system, in which members use their iPhone or Android to take a digital photo of the front and back of the cheque. The cheque is then processed electronically from start to finish, Gonthier said.

The applications use the same digital security encryption as DCU's PC Deposit, a program launched in 2008 that lets users scan cheque from their home computers and deposit them safely, Gonthier said. Since the PC Deposit program started, about 7,600 members have used it every month, and about $300 million has been deposited since the launch two years ago.

In the few weeks Mobile PC Deposit has been live, about 2,500 users have already tried it out, Gonthier added.

Applications are available as free downloads through the Apple App Store and Google's Android Market.

Plans are in the works to build systems for BlackBerry users, as well as other mobile devices. "It is our intention to roll this particular application out full-force," said John LaHair, DCU public relations manager.

The PC Mobile Deposit system is "a great application of advanced technology," said Dan Egan, president of the Massachusetts Credit Union League.

Convenience is the top factor in a customer's decision to select a bank or credit union, so staying on the cutting edge of technology is important, Egan said. Egan uses an iPhone, and said he does a lot of his banking and bill-paying with the device.

Mobile Banking - Banc Sabadell launches iPad app

The iPad hasn’t yet launched in Spain, but that hasn’t stopped Banc Sabadell from getting an early jump on launching its own iPad app. The bank says it will be the first financial institution in Europe and among the first worldwide to offer an iPad-specific banking experience.

The bank reworked its iPhone mobile banking service to “make the most of the new interactivity and touch-screen features offered by Apple’s iPad device,” it said in a press release. The new version of BS Mobile is designed for both personal and corporate customers.

The application is already available in the Apple iPad application store.

World Bank report cites risk to remittances

The Philippines remained the world’s fourth highest recipient of remittances from nationals in 2009, even as these flows face risks from high unemployment rates in host economies, the World Bank said in a report, “Migration and Development Brief”, posted on its Web site recently.

The report showed the Philippines trailed only India ($49 billion), China ($48 billion) and Mexico ($22 billion). Remittance flows to developing countries could grow 6% to $335 billion this year, a turnaround from 2009’s 6.2% dip to $316 billion, it added.

Central bank data show that money sent home by Filipinos abroad beat official projections of a 4% rise last year, actually growing 5.6% to $17.35 billion. These flows grew by an even faster 7.75%, year on year, to $2.786 billion in the first two months of this year, the same data show.

But the report said remittance growth could be tempered by uncertain employment prospects in high-income markets. "... high unemployment rates... in receiving countries... may give rise to pressure to impose additional restrictions on new immigration," it said, adding that such outlook could also dissuade high-skilled workers - a source of big remittance values - from migrating.

Process improvement anyone?

Take a lighthearted break, relax and prepare for your flight. We have a look inside the Boeing factory as a 737 is assembled and takes to the air. Makes our business processes look a bit silly.