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WHY AN AMBIGUOUS ECONOMIC FUTURE IS POINTING FINANCE TOWARDS ALTERNATIVE SOURCES OF DATA

Omri Orgad, Managing Director, Luminati Networks

 

Every market, every investor, and every business owner in the current climate is looking for signs: signs of recovery, or signs of what is to come next. In a market that frequently resembles quicksand, every economist, banker, or investor is looking for that one insight on which they can base their future strategy. In the search for certainty and a clear direction, organisations in finance are now exploring a plethora of high-frequency alternative data sources to figure out where we are and where we are going.

This lack of near-term visibility is accompanied by an abundance of contradictory signals from governments worldwide. The almost impossible to foresee series of events since March has made it much harder to make accurate valuations and is complicating risk-reward calculations. This ambiguity is driving the financial world to consume significant amounts of alternative data.

In the world of finance, the way we manage, and access money has changed unrecognizably over the past decade. Disruptive technological advances have drastically shifted our approach to borrowing and saving, managing investments, interacting with financial advisors, and more. Could the way we approach data sources undergo the same radical level of change?

 

Omri Orgad

So, what is Alternative Data?

Having access to data sets that reflect a minute-by-minute snapshot of the true state of the economy is all important in today’s financial markets. In a rapidly changing business environment, alternative data, also known as external data, is undergoing a rapid escalation in popularity. Alternative data is defined as data derived from non-traditional data sources, such as social media networks. It gives financial market players such as bankers and investors information and unique insights to help them evaluate loans, investment opportunities, or business decisions, which are necessary in the current uncertain business climate, as traditional data sources such as government or analyst reports simply cannot match the current pace of markets changing.

As a result of this, the alternative data market is already huge and growing. It is expected to become a $1.7 billion industry in 2020 and double year-over-year. It encompasses a plethora of varied sources, these include natively digital information, such as web traffic, online buying habits, pricing strategy, social media activity, and government publications. Other examples include pharmaceutical approvals as well as more granular indicators of financial performance, such as ocean cargo and automobile registration information.

 

Not your usual financial forecasts

Credit and debit-card spending can demonstrate the value of alternative data in the current times. The latest figures compiled by Opportunity Insights at Harvard University looked at spending patterns in Georgia and Florida, two of the first states to reopen. The spending patterns in these states look very similar to those in New York and Massachusetts, which have only recently begun to reopen. This suggests that being allowed to go out and spend is less important than consumers feeling confident about doing so. And that’s where the usual/traditional reports and numbers fail us. Instead, the key to forecasting the future of economy in a time of unprecedented crisis appears to lie in figuring out when people will feel confident enough to spend “normally” again – and that kind of assessment can only be delivered by Alternative Data.

Whether it is online reviews, or posts on social media platforms like Twitter – these can act as indicators for how people feel at a given moment and their willingness to spend, something that is true for any market globally. Personal spending is generally considered to be a sign of a healthy economy and represents a clear indicator of economic recovery.

Alternative financial models also consider “unstructured data,” or data which is not organised in a pre-defined manner, which can be leveraged to be understand consumer behaviour and experiences. For example, data on mobile payments and/or generated by mobile devices creates enormous amounts of information that can be used garner financial insights.

 

How alternative data can benefit consumer lending

The fintech sector has been a frequent user of alternative data models for credit scoring. This can ultimately provide a better approach for consumers, especially considering the immense level of financial strain much of the population is currently under.

Traditional banks are beginning to understand this as well. The current situation makes it difficult to predict what the future brings, inhibiting their ability to accurately estimate credit via conventional means. In the US, 840 companies in total (with more added daily) have stopped providing annual credit reports. Since banks and other creditors use credit reports to make lending decisions, when debts do not appear on a report, a creditor cannot accurately judge the borrower’s capacity to repay. If debts are not reported to the consumer credit reporting agencies, lenders cannot make informed underwriting decisions.

Potentially, this means a person could take out a large loan at one bank and then take out an equally large loan at another institution, even when this borrower lacks any realistic capacity to repay both. This type of losses can add up quickly, and history tells us economic consequences can result from the excessively easy provision of credit.

The way to protect the credit of consumers adversely affected by the Covid-19 pandemic is not a cessation of credit scoring. Rather, it’s by revamping the credit scoring models and adding other alternative data models. This means having a scoring system that factors in human behaviour, which is easily monitored via alternative data, allowing those harder hits to have access to credit which they desperately need.

 

A helping hand for businesses and consumers alike

Novel problems require novels solutions. As data is the core of almost all modern business decision making, dealing with Covid-19 and the associated economic issues it presents means that businesses may be best served taking new approach to data. This will allow them to be able to tackle the difficult financial decisions that 2020 is forcing them to make in the most agile and informed manner possible.

But it won’t just be one party that enjoys the fruits of embracing a non-traditional approach to data, everyone from struggling families looking to make it until payday, to wealthy institutional investors, to your run of the mill high street bank has something to gain from this new paradigm for collecting data.

 

Finance

THE OUTPERFORMER’S APPROACH TO FINANCIAL PROCESS AUTOMATION

By Michelle Trapani, Director of Product Marketing at Kofax

 

Achieving more with less is the mantra of our times. C-suite leaders demand greater efficiency. CFOs are looking to reduce costs. Customers and employees expect stellar experiences. The ability to outperform these expectations hinges on your financial operations, a vital area impacting every facet of your business.

For instance, if vital master data is incorrect, it’ll have a negative impact on service level quality, as well as the reputations of the finance and purchasing departments. Without accurate and timely visibility into processes, transparency is reduced, and it’s more difficult and time-consuming to manage compliance. The combination makes it harder to please executives, CFOs, customers, and vendors.

That’s why financial process automation is the key to operational efficiency and the overall success of your business. Even small- and medium-sized businesses are investing in process automation to optimise the financial processes within enterprise resource planning (ERP) systems, such as SAP.

For many, accounts payable is the first financial process to be automated. Like many other financial areas, Accounts Payable (AP) is mired in paper and consumed by highly manual tasks. For these reasons, once AP is automated, the benefits become quickly apparent, leading firms to immediately consider which other financial processes they can optimise. However, outperformers know the approach that yields the greatest return is automation of the entire purchase-to-pay process chain.

Why? Let’s consider what benefits can be gained from automating document-driven and transactional processes tied to an SAP ERP system – in AP and beyond.

 

Why a high-level of automation is an advantage

We don’t have to look far to see how end-to-end automation eliminates labour-intensive work, reduces costs, and increases process efficiency. Organisations with high levels of automation provide indisputable proof of the advantages of the outperformers’ approach.

According to research by Shared Services Link and Kofax, just 12 percent of organisations with high levels of automation manually process their invoices compared to 74 percent of those with low levels of automation. In addition, only 41 percent of highly automated companies experience problems with purchase orders, 24 percent have poor visibility into spend, and 8 percent fail to capture early payment discounts. By comparison, those with low-level automation report these same problems significantly more often: 68 percent, 23 percent, and 24 percent, respectively.

In an age when process automation has become table stakes, there are clear advantages for organisations that optimise processes across the business. “Best-in-class” firms – those with high levels of automation – don’t only become more competitive, they save time and resources as well.

Comparing “best-in-class” organisations to others illustrates the sharp differences. According to Ardent Partners, a “best-in-class” organisation processes 57.1 percent of all invoices “straight-through,” in just 3.9 days at an all-inclusive cost of $2.87 per invoice. By contrast, the gap with other organisations – those with low levels of automation – is wide: Only 16.1 percent of invoices are processed straight-through, and a single invoice takes 17.1 days to close and costs $15.38. Further, “best-in-class” organisations experience 81 percent lower invoice processing costs and 77 percent faster invoice processing cycle times.

 

Why ERP optimisation?

Another reason to follow the outperformers’ approach is to increase the return on investment of Enterprise Resource Planning (ERP) software. Many organisations haven’t fully leveraged their investments in ERP software, like SAP, giving them plenty of hidden opportunities to exploit.

“ERPs are not optimised for all the complex activities occurring today, such as matching printed or electronic invoices with supplier master data, purchase orders, shipping, tax and discount data,” says consultancy The Hackett Group. “Since it can be cost-prohibitive to replace a legacy ERP, companies often augment them instead with document management systems.”

When processes are paper-driven and manual, financial teams struggle to meet the volume-based performance requirements set by their CFOs. Meeting the high bar for raw numbers of invoices and payments processed is exceedingly difficult without automation. Think back to the pain points listed above. Every time the process is interrupted because the PO number is wrong, there’s an invoice exception or an early pay discount is missed, the process slows appreciably – or breaks down entirely.

One option is to use a certified add-on solution providing a single software platform to automate a series of processes directly within the ERP system. For SAP users, this type of solution offers more than integration with the ERP system; it provides the exact same look and feel as any other SAP transaction. It can be presented inside of the SAP GUI, providing non-SAP users an intuitive interface, and offering a real-time view of workloads, pending tasks, document inflow, ongoing transactions, and up-to-the-moment validation against SAP data. Solutions like this are proven to help users become more cost efficient, improve control over financial processes and shorten total processing times.

 

How to dominate your financial process

As the examples above show, expanding process improvement from AP to the entire purchase-to-pay process chain allows you dominate your financial processes in SAP, realise maximum efficiency and take your current ROI to the next level. Whether you’re just starting your automation journey or want to expand past AP, a full-scale strategy for end-to-end financial process automation will enable you to begin working like tomorrow, today.

 

About the author

In her role as Director of Product Marketing, Michelle Trapani delivers market positioning, strategic narratives and go-to-market strategies driving awareness, preference, and growth – bringing an increased level of insight, leadership, and overall execution discipline to Kofax’s growing business. Michelle was most recently with Cinch Connectivity Solutions where she reduced product launch times from eight months to eight-12 weeks. Previously, Michelle was with Adobe, Equinix, IBM, Infogix, iPass, Macrovision and Vision Solutions. Michelle earned a Bachelor of Arts degree at Illinois State University.

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Finance

SAFEGUARD YOURSELF FROM FINANCIAL STRUGGLE AND UNCERTAINTY IN THE CASE OF DEMENTIA

Despite the rising incidence of dementia globally – The World Health Organization (WHO) estimates one new case every three seconds – and the risk of losing mental capacity in old age, few individuals plan for this possibility.

Dementia is caused by a variety of brain illnesses that affect memory, thinking, behaviour and ability to perform everyday activities. The WHO estimates the number of people living with dementia worldwide will almost triple to 152 million by 2050.

September is Alzheimer’s awareness month, an international campaign by Alzheimer’s Disease International to raise awareness and challenge the stigma that surrounds the illness. Financial management is one of the first tasks which deteriorate with the condition, leaving people struggling to do simple tasks such as paying bills or managing their tax affairs.

“Most people don’t like to think about death, dying or incapacity,” says Mark Hawes, certified financial planner at Alexander Forbes. Figures from the Masters of High Courts back up this assertion, revealing that more than 80% of South Africa’s working population don’t have wills.

“If you have been diagnosed with dementia, the best way to avoid unnecessary financial burden or being taken advantage of financially, or otherwise, is to put plans in place immediately. If one day you are not able to look after yourself, you and your family should know who these responsibilities will fall to.”

Most types of dementia are progressive. Therefore, the earlier it is identified the better. In addition, the easier it is to put the necessary preparations in place. Very importantly, while our faculties are still with us we can and should be involved in the important decisions for our own future.

At the very least, it is time to ensure that your wishes are documented, understood and are willing to be carried out by all involved. Naturally the inverse is true. For the caregivers and the persons tasked with the respective areas of responsibility, making sure that you understand and are willing to carry out the wishes of the affected person (within reason) is paramount in the early days of diagnosis.

“It is therefore important to allocate someone you trust with different areas of your life. Consider your options and where you have existing policies in place, double-check what you are covered for.”

Putting your plan in place simply gets everyone pulling in the same direction. Do this for at least three areas with the help of a trusted professional:

 

  1. Set up or review your will

To ensure that this is done accurately, you need to be fully informed about what assets and other financial products you have. Importantly, remember that all retirement funds fall outside your estate and so beneficiaries should be nominated on each retirement fund respectively. In addition, bring in your trusted and professional financial adviser to make sure your legacy planning is effective, efficient and accurate to ensure that your wishes and priorities are met.

 

  1. Choose your healthcare professionals and caregivers

Understanding the expected treatment and what your lifestyle may look like in the years to come will provide insight into what facilities and care you may require. This information puts a sense of control and independence back in the affected person’s hands. It will create a great sense of comfort that the challenging journey ahead will be manageable and on your own terms. Of course, it is always recommended to include your loved ones when making the decisions – especially the ones who are expected to carry out your wishes, if only to understand if they have the capacity to do so. The cost of care for those with advanced dementia should also be factored in, as full-time nursing can be expensive. Knowing your expected care and the respective costs puts you back in control.

You can then compare your requirements with any existing insurance policies to see where you can provide the financial resources. Importantly, as cash flow may come under pressure for you and your family, you would also be able to see which policies are no longer a priority and can be cancelled. In addition, you will be able to allocate your savings and investments toward your expected expenses or make alternative arrangements with the people in your support structure – especially your family where available.

 

  1. Who will conduct your financial transactions on your behalf?

The Covid-19 pandemic has seen increased reports of fraudsters targeting unsuspecting and vulnerable people. Those with dementia who are already struggling to use ATMs or do internet or telephone banking may be more prone to being targeted or simply telling strangers their bank details. Now more than ever identity theft is a real concern.

It is therefore highly recommended that a trusted and responsible person or family member is appointed to conduct financial transactions on behalf of the affected. For high net worth people, a special trust can be set up and preferred trustees (along with an independent professional trustee) appointed to ensure the financial affairs and assets are managed effectively. Again, legacy planning is crucial to helping the affected person to rest easy.

Many people are unaware that a power of attorney is invalid if a person is no longer of sound mind, and financial institutions will not assist until the person is placed under administration or curatorship.

Therefore, it is important that this person is aware of your lifestyle and preferences. This can be simply from what groceries you buy to which financial institutions and structures your make use of. The latter should be considered together with your trusted professional’s financial adviser.

Hawes says it is important to know what policies one has and what they cover. “You need savings to cover your cost of living when you’re alive and no longer working. Understand your medical aid and what they will cover – at minimal, you should have a hospital plan and gap cover.”

Hawes also advises introducing your trusted confidant to your certified financial planner, in the event that something happens.

“Many people only bother to find out their family history after something happens to them. Find out if you have a history of cancer or heart conditions, Alzheimer’s or dementia in your family. By having these difficult discussions now, a person is better able to decide how their money should be used, and is less likely to be financially exploited at a later stage.”

 

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