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Q4 FIG Insights

This quarter, our industry experts take a look at how changes in technology and payment systems are impacting Financial Institutions.

Welcome to the final edition of our FIG newsletter for 2019. This quarter, we’re taking a closer look at how changes in technology and payment systems are impacting Financial Institutions.

In the FinTech and Asset Management spaces, our sector heads discover how AI and machine learning are helping FinTechs to on-board clients and to expand into new markets. They also discuss how the introduction of faster payments is one of several new developments that will significantly advance the sector.

We explore how the efficiency, risk management and cost benefits of host-to-host integration are driving greater take-up across the insurance sector, and how technology and collaboration are essential for the future of trade finance.

With such a huge range of technological advancements ongoing across the globe, our team are here to support your business with a range of services and solutions. To speak to us about how we can help you, please contact your Relationship Director.

Barclays is committed to the Financial Institutions Sector and we continue to invest in our sector specialist teams, infrastructure and our product capabilities in order that we can further support and grow our relationships with our FIG clients. We look forward to strengthening these relationships and wish you a successful 2020.

Philip Bowkley
Global Head of Financial Institutions Group.

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  • Banks, Broker Dealers & Alternative Finance

    Collaboration is key for trade finance

    What are the hot issues currently facing the trade finance sector, and how will banks need to work together to succeed?

    The pressures of economic volatility, increasing regulatory requirements, disruptive competition and changing customer expectations are all taking their toll on the economics of bank-provided trade finance. At the same time, given heightened macro-economic risks, trade finance has never been more important for our corporate customers.

    To continue to operate successfully, Trade teams are now turning their focus to capital and cost efficiencies, whilst attempting to keep up with the pace of technological change.

    Capital efficiency
    Market, regulatory and economic conditions continue to make capital scarce, and banks are increasingly seeking mechanisms that allow them to continue providing services to their corporate customers, whilst preserving capital.

    One such mechanism is the legal lending limit guarantee. Local regulations often require separate capitalisation of branches and subsidiaries. A well-structured financial guarantee from another bank can often be a more efficient mechanism to capitalise overseas subsidiaries, and can be done either for specific transactions or at a portfolio level.

    For example, a UK bank with a subsidiary in India could use a legal lending limits guarantee from another bank to allow it to continue operating and supporting its customers in India, while decreasing the amount of expensive capital held there.

    Collaborating for cost efficiencies
    Many global banks are increasingly rationalising their correspondent banking networks to drive cost efficiencies. This can mean retaining a physical presence only in those regions with the strongest growth potential, and using documented trade instruments to collaborate with other banks in non-represented regions as and when required.

    This is not a new phenomenon by any means; however, the impetus for cost efficiency, coupled with the increased cost of regulation and enhanced due diligence, means that collaborating across foreign banking networks is now more important than ever before.

    Exporters to developing countries, for example, need access to correspondent services from their bank, or at least some connectivity with a local bank, to support their in-country needs. Whilst it was common for most large European banks to have links across all major geographies, this is no longer the case – the costs involved to maintain these networks can no longer be justified. Instead, trade finance providers are increasing likely to look at forming correspondence trade networks with other banks that have a local or regional presence, to support their customers.

    Trade finance goes digital?
    As with almost every aspect of the financial services landscape, technology is also very much front of mind for trade finance, bearing in mind the sheer pace of change and the need to upgrade legacy systems – without disrupting customers.

    Traditional, document-heavy trade finance businesses are ripe for digital innovation. There has been a marked shift towards digitisation across the sector, with more institutions looking to deploy AI and other technologies to automate manual processes.

    Optical character recognition, AI and machine learning are increasingly used to scan, read and process documentation prior to releasing payment without any human intervention. A mere dream five years ago, this is now the reality for many.

    The uptake of technology is only likely to accelerate across the entire trade finance process, as more and more consortiums and groups of banks work together on different technological initiatives.

    Committed to change
    The need for change within trade finance has never been more pressing. It’s clear that banks need to collaborate across borders, within networks and in the pursuit of technological innovation to succeed.

    At Barclays, we’re fully committed to working with our banking clients and the wider global banking community to deliver fit-for-purpose trade finance solutions. We’re investing significantly in technology and re-platforming our trade finance business to drive these changes. For more information, speak to your Relationship Director.

    Sabry Salman
    Global Head of Banks Coverage & Head of UK FI

    Lauren D’Arcy
    Head of Overseas Banks, Broker Dealers and Affiliates

  • FinTech

    How are AI and machine learning reshaping the market?

    AI and machine learning continue to disrupt financial services, offering potentially huge benefits to both businesses and customers. However, there’s a fine balance to be achieved between driving innovation and managing the potential risks of the technology. 

    Artificial Intelligence, machine learning and the use of data are rapidly reshaping the financial services sector. While some of the more traditional firms are increasingly deploying these technologies, FinTechs are, by their very nature, at the forefront of this disruption.

    Often, traditional financial institutions bear the inefficiencies, and costs, of using legacy systems and manual processes. On the other hand, FinTechs have had the advantage of starting from scratch to build cutting-edge systems, processes and platforms. This allows them to acquire customers at a much faster pace and much lower cost than traditional players, opening up new revenue streams and helping small businesses and previously under-served individuals.

    A new era of onboarding
    Some of the ways in which FinTechs are using these technologies to enable them to reach new parts of the market were brought to light at this year’s Barclays New Frontiers Conference in November1.

    The conference explored how technology is being used to improve lives, industry and society. During the FinTech panel event, we heard how businesses like Ant Financial, Crowdcube and PAID are using data and machine learning in innovative ways.

    For example, Ant Financial’s 310 model uses AI and data to provide loans of around $1,500 to small businesses2 that may previously have struggled to apply for and obtain financing. When a business applies, it takes three minutes to complete an application, and one second for the model to approve or decline it. All of this happens with zero human interaction.

    Crowdcube’s platform allows fast growing companies to raise capital at an incredible speed. For example, in 2018 Monzo raised £20 million from 30,000 users in just five hours. For fundraisers of this size, Crowdcube processes 800 retail investments every 60 seconds. The platform has over 900,000 registered investors, with 6,000 new investors registering every day.3

    PAID’s work management and payment platform offers non-recourse invoice factoring (instant payment) to micro-businesses and freelancers in the gig economy. PAID’s entire process – onboarding, contracting, invoicing, issuing of payments and credit control – is automated. This allows it to bring new clients onboard at an incredibly low cost of an estimated £6 per client: £3 for KYC and £3 to assess credit risk.4

    Compliance and the human factor
    These examples clearly demonstrate the benefits and huge potential that AI, machine learning and data offer to both businesses and individuals. They fundamentally transform key business functions such as straight-through processing, onboarding and credit risk profiling. However, all this innovation always needs to be balanced with compliance.

    AI and machine learning undoubtedly improve decision making and drive efficiency in businesses. They allow for the creation of tailored solutions, and eliminating, or at least greatly reducing, some element of human error. Whilst embedding AI and machine learning into the heart of their company, FinTechs should keep an eye on risks that can arise from this technology, for example bias and complexity in algorithms. As such, FinTechs should ensure they have adequate validation frameworks, policies, practices and risk management in place before launching any new processes to ensure that AI and machine learning can provide the greatest benefits to their company.

    In today’s increasingly digital world, the interaction between technology and people has never been more nuanced. It’s imperative that all financial services businesses keep regulation and compliance front of mind, and strike the right balance between embracing new technologies and managing the associated risks.

    Sources

    1 Barclays New Frontiers Conference, https://home.barclays/news/2019/11/barclays-new-frontiers-2019/
    2 Rise Fintech Podcast, Roland Palmer – Barclays New Frontiers 2019 Mini Podcast Special
    3 Rise Fintech Podcast, Matthew Cooper – Barclays New Frontiers 2019 Mini Podcast Special
    4 Barclays New Frontiers Conference Panel: How is Fintech increasing access to financial services for both consumers and small businesses?

    Jenni Himberg-Wild
    Head of FinTech and PSPs Coverage

  • Insurance

    Host-to-host integration is on the rise

    The efficiency, risk management and cost benefits of host-to-host integration are driving greater take-up across the insurance sector.

    Over the past year we've seen a marked increase in appetite across the insurance market to move towards host-to-host integration (H2H).

    Keeping on top of multiple work streams and competing priorities is a key challenge facing treasury teams at many insurance companies. Managing liquidity, optimising cash positions and FX exposure, securing finance, controlling risk and managing bank relationships all require accurate and timely financial data globally.

    More and more insurers have begun tackling these issues by moving away from a decentralised treasury model, which can be cumbersome and time consuming. Instead, they are in favour of an integrated Treasury Management System (TMS) or an Enterprise Risk Platform (ERP), which is a key requirement in connecting their pipe to financial institutions.

    H2H connectivity gives financial institutions the flexibility to directly exchange high-volumes of automated and real-time data using a uniform, simplified process.

    Streamlining processes
    Insurers rarely rely on a single banking relationship, instead using a myriad of different communication methods, protocols, proprietary standards and processes.

    One of the main benefits of H2H is more streamlined processes and rationalisation of an often complex mix of banking platforms used across the business. This in turn can simplify fee structures and reduce or eliminate unnecessary services.

    For insurers operating around the world across multiple jurisdictions, H2H connectivity means full global visibility of day-to-day transactional data. The single entry point service helps insurance clients to streamline processes from their TMS straight through to multiple clearing schemes. We support several connectivity protocols and industry standard formats, providing clients with the flexibility to export payment and collection instructions from their internal systems and seamlessly. This is particularly beneficial to clients looking to reach their accounts in multiple jurisdictions, with multiple banking partners. Clients are able to initiate mixed files including mixed transaction types, debiting various accounts and countries, reducing costs in the process.

    Instead of time consuming manual processes to download data that might eventually provide outdated information, the H2H automated data exchange facilitates aggregate data feeds more easily and frequently. This allows, for example, more effective redeployment of surplus cash across the business.

    Speeding up payment and collection
    Payment runs, intraday positions, FX trades and securities confirmations are essential in monitoring and managing central treasury, yet many insurers simply don't have the capability or resources to deliver and manage the automation and integration of the data they require.

    Through a reduction in individual bank channels and touchpoints, H2H connectivity allows insurers to deliver straight-through-processing (STP), speeding up both payment and collection processes that can sometimes take days in a decentralised treasury model This ultimately removes the need for web/cloud-based data downloads, manual importing/exporting, decreasing likelihood of manual error.

    The benefits of H2H-enabled STP extends beyond payments, with faster reconciliation of invoices and transactions, helping to manage cashflow more effectively. As a result, treasury teams will be better able to see what's coming in and what's going out to manage working capital.

    The H2H technology can also be leveraged to reduce operational risks for insurers, thanks to improved reconciliation through automated payment status reports and industry standard statements to track and match entries adding significant benefits in terms of regulatory compliance.

    Finally, with automated reconciliation and data aggregation providing faster and better access to data than ever before.

    Short and long-term gains
    While the cost and speed of adopting H2H will clearly vary depending on the complexity of an insurer's needs and structure, H2H reporting functionality can often be implemented in a matter of weeks.

    Not only can this deliver immediate operational benefits and long-term efficiency gains, but by reducing the need for manual intervention, it can create opportunities to redeploy staff to more value-adding activities.

    We are keen to share Barclays’ expertise in H2H implementation with our clients across the insurance sector. For more information, contact our dedicated insurance team today.

    James Morris
    Head of UK Insurance

  • Asset Management

    Shaking up payments

    The evolution of payment systems is set to have a big impact on asset management, given the volume of payments across the sector. 

    We’re looking at the top 3 new developments in the payments landscape for our final article of 2019.

    Faster Payments
    Firstly, the transfer value ceiling for Faster Payments is set to rise from its current level of £250,000 to an anticipated £20 million in the first quarter of next year.

    Whilst the Faster Payments scheme have confirmed this, banks will also be setting their own limits of payments, which will undoubtedly give asset managers more options.

    With the current £250,000 limit, most firms rely on BACS transfers for larger payments, which can take up to three days to complete. This requires firms to ensure they have sufficient liquidity until the payment is made, with implications for the level of funds in interest – earning deposits or invested for better returns.

    By allowing irrevocable same day transfers, this new payment type should eliminate the need for pre-funding the day before payment, therefore helping liquidity. It will also deliver a better client experience, as they will get their funds back 2 days faster than if they used BACS. For our clients, it means less focus on their liquidity as they only need funds in their accounts the same day of the transfer. Faster Payments is set up instantly, with no further paperwork, and there are no overlimit charges for clients if they exceed their BACS limit. This fast service means that there is a minimal risk of a delay in setting up the payment type with the need of a service user number.

    Alternatively, same day CHAPS payments are typically three to four times more expensive than Faster Payments, due to the older, slower technology used.

    Faster Payments typically take little more than five minutes and can significantly reduce asset managers’ costs when paying out investments or redemptions and give clients faster access to funds.

    Request to Pay
    The Faster Payments system is also opening up alternatives to direct debits or invoices in order to collect client payments.

    From 2020 the Request to Pay option will enable asset managers and other businesses to send a Request to Pay to clients, which they can either pay in full, partially pay or decline. This is a benefit for the client, as if they’re sent a request to pay they have full control over whether or not they accept it. It’s not just corporates that can request this, so it gives the power to whomever is being asked.

    Launched by Pay UK, this is effectively a secure messaging service, utilising existing payments infrastructure, designed to give greater control, flexibility and transparency around payments for both organisations and consumers.

    Confirmation of Payee
    Another change set to shake up the payments landscape is the Confirmation of Payee system – an account name-checking service designed to prevent payments being inadvertently misdirected and to combat invoice-based, authorised push-payment frauds.

    Currently, transfer payments only require an account number and sort code to be processed. Under the new system, the exact name attached to the receiving account must also be provided, giving much greater confidence that money is being paid into the right account.

    This should help to prevent fraudsters sending out fake invoices requesting payments into fraudulent accounts, and help asset managers to ensure they’re only making payments to genuine clients.

    Implementing and communicating these changes across hundreds or thousands of client accounts will clearly present a significant administrative challenge to many firms, particularly where the payments process is made more complicated by the use of third party administrators.

    Confirmation of Payee was due to come into effect earlier this year but is now expected to launch in Q1 or Q2 2020, and we are committed to working with our clients across the sector to prepare for the changes.

    Fraud alert
    Finally, in the run-up to the festive season, we would urge all clients to be particularly vigilant about CEO impersonation fraud, which tends to be more prevalent during the holiday season when firms may be short staffed or ‘off guard’.

    It’s vital to keep staff alert to the fact that inventive fraudsters may attempt to use the name of anyone within the business with authority to trick staff into paying fake invoices.

    Meanwhile we’ll continue to keep you informed about the evolving payment picture as it becomes a reality.

    Andy Ponsford
    Head of Funds and Non-Bank Financial Institutions for Europe

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