More than 10 years after the outbreak of the global financial crisis, the financial services industry is still reeling. Some of the big players continue to find themselves under intense scrutiny and old ailments, like non-performing loans and liquidity issues, are harmful in the context of macroeconomic trends.
The financial services industry has been, and still is, in a process of transformation. Fintechs are bringing new competition to the sector at the same time as costs are rising – largely driven by regulation. Technology is also shifting the goal-posts. Banks now have new tools like artificial intelligence, machine learning, predictive analytics, robotic process automation and blockchain to work with.
But regulators are not making it easy to exploit these new technologies. While they offer the potential for huge cost savings, their ability to manage risks has not been sufficiently proven. Regulators view new technology with suspicion. Unchecked, it can create new risks of service outages or information security incidents. In addition, regulators need the assurance that the data used to calculate risks is reliable; if not, it could lead to false decisions. It’s a double-edged sword; big data sets can detect suspicious patterns, which can help financial institutions fight financial crime. But this increased automation, for example in online based services, can also open the door to those who are able to exploit weaknesses in the system.
With tech comes data
From both a regulatory and a business point of view, data plays a key role in the financial industry. However, it also brings fresh attention to the question of data governance. The processing capability of many IT departments still cannot match the potential of big data. A recent study by Reply shows that companies are still reluctant to invest in quality data governance systems, even though there are well established technologies on the market. Nonetheless, external bodies are intensifying the pressure to conduct proper data governance audits. Regulations such as GDPR, IFRS 17 and BCBS 239 demand considerably more insight into the company’s own data landscape than existed before.
Smart data governance can only be truly beneficial when used in conjunction with other data management tools. Companies must focus on both the proper analysis and management of data, which produces better compliance and more reliable and faster decision-making processes. It will also minimise risks associated with incorrect or incomplete data sets. As such, prioritising data governance solutions is an investment worth making.
Of course, we can’t ignore blockchain. The Reply study predicts a further integration of blockchain across the financial sector. In addition, it forecasts that blockchain will gain further significance in the context of asset tokenization, the division of assets, such as real estate, into tokens stored in a blockchain which facilitates more efficient trade on a secondary market. In connection with Know Your Customer/Anti-Money Laundering (KYC/AML) protection, blockchain provides more security through improved identification management. Costs can also be kept low through Blockchain-as-a-Service (BaaS) offerings which should further increase acceptance of the new technology.
Skills Gap as a fundamental risk
The Reply study has uncovered many potential opportunities in the financial sector, each with their own potential risks. However, one of the major challenges faced by financial institutions is the looming skills gap. The modernisation of the IT landscape will act as a basis for more innovation and agility as well as the development of new Cloud services, which requires a skilled workforce. Skills and innovation go together and in a competitive landscape, known as “Digital Darwinism”, enterprises need to make sure that innovation is part of their DNA. Innovation is needed both in employees and in the processes that empower change towards a more customer-centric and efficient organisation.
In the context of this multidimensional risk landscape, the Reply Financial Services Outlook 2019 gives a 360° overview from Risk Management to Digital Transformation. This can aid decision makers seeking to prepare for the integration of new technology driven concepts such as AI, Big Data or Blockchain while keeping macroeconomic and geopolitical currents that will impact the journey ahead in mind.
The full whitepaper is available for download here: https://www.reply.com/avantage-reply/en/financial-services-outlook-2019
HOW TO MANAGE YOUR CASH FLOW IN UNCERTAIN TIMES
While the world is constantly changing, probably at a faster pace now than ever before, businesses need to manage cash flow and costs to drive success in uncertain times, says Matthew Thorpe, partner at Haines Watts Essex.
Managing people and expenses
There are certain costs that you just can’t avoid as a business – to keep your operation running seamlessly, but scrutinise the detail and cut down on any non-essential expenses. Check things like your SaaS subscriptions and look out for costs that auto-renew and if you do cancel, remember to also cancel your direct debits too.
You might want to put a freeze on hiring new people, but ensure that other roles and responsibilities are clearly and efficiently assigned across your team. The Coronavirus Job Retention Scheme (CJRS) has been introduced by the Government to help UK employers access support to continue paying part of their employees’ salary to avoid redundancies. Affected employees are classed as “furloughed workers”.
Once furloughed, the employee cannot work or they will not qualify for the scheme. For businesses that perhaps need to go further, there may be some roles they don’t need any more, but businesses should work sensitively with people to manage this.
Cash is king
In uncertain times, owner managers will need to keep operations going to ensure financial stability. You should look to manage debt more efficiently by negotiating extended payment terms with creditors. You could also renegotiate loans for longer repayment terms to give yourself a lower monthly payment, helping the business to set some cash aside each month.
As a business owner, you need to create a cash flow projection and update this regularly if you are to improve things. You can do this using financial information to create a picture of how the business will look in the next 12 months. The forecast needs to show revenue sources and expenses, which will show the ups and downs of business income and can be used to make sure that enough finance is in place.
While banks and other finance providers recognise that the cashflow of a business may be disrupted by the impact of Covid-19, they are still going to want to see that you are viable and continue to trade in these uncertain times. Make sure your business is organised and don’t let disorganisation cause unnecessary issues. You can evidence this by having detailed forecasts; current order books and projections (as best as possible).
Having instantly accessible, accurate financial information allows you to plan effectively, spot issues before they become problems and manage your money in the most efficient and rewarding way.
Software is now incredibly user-friendly and accessible from anywhere. For a business owner embracing the technology, this means:
- Invoicing can be done instantly when a job is complete, emailed to the customer with an easy to use link to a payment platform.
- Comparison websites can automatically monitor and help maintain lowest cost for things such as light & heat, insurance etc.
- Technology can be used in place of face-to-face meetings. It can also enable them to adapt production lines to different demands.
All of these things and more, used properly, can make managing your business finances quicker, easier and often cheaper. You will also be able to bring clarity to where your business stands and prepare for the next steps.
HOW FINANCIAL SERVICES CAN GET TO GRIPS WITH RISING SUPPLY CHAIN RISK
By Alex Saric, smart procurement expert, Ivalua
UK businesses have never been more dependent on their suppliers to help them deliver goods and services to their customers. Be it retail, manufacturing or financial services, suppliers have a vital role to play when it comes to innovation and meeting customer expectations. However, as supply chains become increasingly global, businesses are potentially exposing themselves to more risk than ever before.
This is especially true in financial services. Whether it’s the impact of geopolitical events like Brexit or global tariff wars, supply shortages, security or the businesses impact on the environment, an organisation’s failure to identify and mitigate risk could see millions wiped off its share price, and its corporate reputation left in tatters. Risk can present itself anywhere and at any time, so financial services firms must be ready to address it. However, many simply don’t have the ability to evaluate suppliers for risk factors, leaving them wide open to business operations being hindered, or being slapped with financial penalties.
More suppliers, increasing risk
One reason why financial services firms aren’t able to evaluate suppliers is the breadth and scale of today’s supply chains. For example, French oil company Total said in in a recent human rights briefing paper that they work with over 150,000 direct suppliers worldwide. This is just one example of how large and varied the roster of partners has become. Research from Ivalua has found that financial services businesses on average are working with around 3,600 suppliers annually, which is evenly split between UK-based and international partners. That number is expected to rise, with 60% expecting the number of suppliers they work with to rise.
The expanding nature of suppliers is only going to expose financial services firms to more potential risk than ever before, yet 78% say they face challenges gaining complete visibility into suppliers and their activities.
A lack of supplier visibility leaves businesses unable to identify and mitigate against supply chain risk. In fact, almost three-quarters (73%) of financial services firms have experienced some type of risk during the last 12 months. These include; supplier failure (43%), environmental impact, such as pollution or waste (35%) and supply shortages (45%). Supply shortages can be among the most damaging to a business, as seen by both the KFC chicken shortage which closed stores, and the summer 2018 CO2 shortage which caused companies such as Heineken and Coca-Cola to pause production, impacting supply across Europe during the World Cup.
Businesses unprepared for the worst
One way financial services firms can better prepare for risk is to ensure they know what to plan for to reduce the impact. However, whilst some say they have a contingency plan in place to deal with risk, many of them are unprepared. Financial services firms admitted to not having comprehensive and deployed contingency plans in place to prepare the supply chain for risk such as; natural disasters (68%), supply shortages (67%), geopolitical changes (65%), environmental impact (63%), supplier failure (62%) and modern slavery (50%).
In order to effectively prepare for these types of risks, it’s vital that financial services businesses fully understand their suppliers, their business environment, global variations in regulations, geopolitics, and a host of other factors. But for many, there are multiple challenges when it comes to gaining this understanding. A prevailing factor is an inability to gain visibility into all suppliers and activity because supplier management data is stored in multiple locations and formats, making insights difficult to access. This leaves teams unable to review supplier activity and assess compliance.
Making supplier management smarter
It’s imperative that financial services businesses are able to respond or prepare for supply chain risk. Clearly, much more needs to be done to ensure they have complete visibility of suppliers, especially in an era where regulators can levy heavy fines for GDPR breaches and scandals spread in minutes over social media. These types of risks can be reduced in the future if procurement teams have a 360-degree view of suppliers which will help with contingency planning and risk management.
For example, in the instance of supply shortages, plans could be put in place that identify alternative suppliers to ensure any shortages do not impact end users. This type of supplier collaboration is paramount when it comes to managing and mitigating against supplier shortages. When it comes to regulations, financial services firms can’t allow a lack of visibility to limit their ability to ensure all suppliers are compliant.
To do this, teams must take a smarter approach to procurement that gives complete visibility into suppliers throughout the supply chain. This will allow financial services firms to identify and plan for risk, reducing the potential damage, and ensuring they are working with and awarding business to low-risk suppliers. Supply chain risk is rapidly becoming an overarching concern for financial services firms, but by providing the ability to assess suppliers, they will have all the insights they need to mitigate the impact on business operations.
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