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WHY LIBOR RETIREMENT IS THE NEW Y2K

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Byline: Dihan Rosenburg, Director, Product Marketing at ASG Technologies

 

With the coming December 2021 retirement of LIBOR, Chief Data Officers in financial institutions are preparing to face their Y2K moment. An estimated $350 trillion of financial instruments are linked to this globally accepted benchmark rate for short-term loans, including adjustable rate mortgages, credit cards, student loans, bonds, securities and more.

The data management challenge is colossal. Over 100 million transactions reference LIBOR and must be replaced with alternative risk-free rates (“RFRs”), such as SOFR for the U.S. dollar and SONIA in the UK.  Making the switch won’t be a simple search-and-replace exercise. Here’s why:

  • RFRs are overnight rates, whereas LIBOR is published for multiple terms (e.g., one-week, three-month, etc.).
  • Credit risks are embedded in LIBOR, while RFRs are “risk-free,” making a simple conversion impossible.
  • RFRs have different behavioral characteristics than LIBOR, resulting in different historical spreads, so fallback rates must be applied.

To make the transformation, contracts referencing LIBOR will all need to be rewritten. Organizations must locate all references to LIBOR in contracts they hold to update with fallback provisions reflecting the new RFR terms, and communicate those new terms to clients.

While some banks have made a start on contract remediation, the data impact is even broader. Firms will need, for example, to create new models for pricing using the new benchmarks, creating new credit risk spreads and evaluating how that will affect margins and profitability—and far fewer firms have yet reached that point. Firms will also need to consider the impact of these new benchmarks on their FRTB and BCBS 239 programs.

 

To Get it Right, Impact Analysis is Vital

The transition of this complex data journey requires robust and comprehensive inventory analysis and data lineage capabilities. This upfront impact analysis is necessary to find the rates and analyze the changes before replacing them.

While firms may try to manage the necessary analysis manually with spreadsheets and subject matter expert (SME) interviews, this approach is particularly impractical for LIBOR migration programs. LIBOR has been around for over 40 years. The rates are primarily sourced and calculated inside of legacy systems—many of these SME’s have long since retired.

Even locating all the references to LIBOR rates will be difficult. The data is spread across unrelated systems and technologies, data will be both unstructured and structured, contracts may be unlinked to amendments, or a host of other data disparities may present themselves. Tracing LIBOR data is also complex, due to inconsistencies in how data is organized at the logical and physical level and transformed across thousands of applications.

 

Fortunately, Metadata Management Applications Can Automate these Tasks

Automated metadata harvesting and management applications are ideal for the unique data management challenges LIBOR migration presents. Here’s how:

  • Automated inventory will accelerate the discovery of where LIBOR rates are referenced, whether in applications, mainframes, ERP systems or contracts.
  • Automated data lineage graphically displays the flow of LIBOR data from its origination in legacy platforms to all final points of consumption—identifying transformation points and systems where derived values are calculated along the way. Intelligent lineage delivers both vertical and horizontal views, offering a tangible connection between the business and technical metadata. It provides a visual, easily digestible artifact that informs the analyses of technology, business and risk leaders.
  • Business glossaries document business processes and terminology and connect technical and business assets. An artificial intelligence (AI)-based recommendation engine (“virtual data steward”) accelerates the speed and accuracy of matching business and technical data, as well as helping to find and track new rates going forward.
  • Impact analysis begins with an understanding of how LIBOR rates are being calculated today. Analysts will find these calculations embedded inside of the SQL code from within the data lineage. The Snapshot feature displays both the current rate and what it will look like post-conversion to test and validate the new piping. By monitoring the lineage as it begins to shrink, users will also be able to track their progress towards meeting the deadline.
  • Data quality information can augment the data lineage analyses to ensure key areas get the attention they require. Other data governance features—including data stewardship, issue management and dashboards—will keep disparate teams informed and coordinated across various concurrent activity streams.

 

From LIBOR Transition to Digital Transformation

Typically, financial institutions have treated similar data initiatives like MiFID II, Dodd Frank and Margin Rules as one-off projects. Disruptions in the global business and regulatory environment are occurring with increasing frequency mandating a more holistic approach. For instance, LIBOR is only one of the reference rates being retired. Other interbank rates (“IBORs”) around the globe are also on the chopping block.

Instead of viewing the LIBOR transition as just another costly, resource-consuming exercise, organizations should see this change a catalyst to uplevel and automate their data management processes to better understand and trust their data.  Here are some benefits that one large financial institution told ASG they received from implementing an automated data intelligence system in just four months:

  • Discovered LIBOR rates across 150 Applications and 20,000 Cobol programs.
  • Solved a nine-month attestation request from their largest client that was being passed from department to department in search of a root cause.
  • Shrunk their footprint of redundant applications, including consolidating ten UDTs to one!

With these successes, this data governance organization was able to easily justify additional investment for other use cases.

By looking at this transition as an opportunity to transform enterprise data intelligence and put in place the processes needed to clean, understand and trust data, financial organizations can future proof their data and adeptly address emerging changes. And with the greater data usage that trusted data enables, they can adroitly exploit new opportunities to enhance operations, deliver greater value to customers and gain competitive advantages.

 

Business

THE ACCELERATION TOWARDS A MOBILE FIRST ECONOMY

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By Brad Hyett, CEO at phos

 

Over the last year, we have seen a big shift towards contactless payments. Fuelling this has of course been the coronavirus pandemic, which has made the public hesitant to handle cash due to the health concerns.

As multiple national lockdowns forced physical stores to close, and customers demanded easy, cash-free payment options, merchants had to quickly adapt. The result? An increased provision of pay and collect services.

In the UK alone, 83% of people use contactless payments according to data from the Office of National Statistics.

So it’s vital that merchants are equipped with the most efficient payment solutions, as the UK heads towards a mobile-first economy.

 

Proliferation of contactless payments

In 2020, 90% of UK card payments were contactless. This equates to an increase of 12% on the year prior, despite the total number of payments made falling by 11% from 2019 to 2020. Moreover, the affordability of smartphones has increased significantly over the last decade. And it’s estimated that 84% of UK adults now own one.

We’re Seeing merchants embrace more efficient and cost effective payment methods in response. While physical payment terminals are often too expensive for many small businesses, software point of sale, or SoftPoS, enables merchants to turn hardware that they already own – i.e. their mobile device – into a point of sale terminal.

With merchants increasingly adopting these innovative technologies, contactless payments will continue to gain popularity among the general public. In 2020, 13.7 million people in the UK either didn’t use cash at all or only used it to make a single purchase. That’s double the same figure from the previous year.

 

Changing consumer demand

Now more than ever, consumers are aware of how innovative payment solutions can add efficiency to their daily lives. As such, consumers now demand better payment services, including reduced queuing times, checkoutless stores, and bespoke loyalty schemes.

Businesses such as Mercedes offer an end-to-end digital car purchasing service, so customers can go through the whole car purchasing journey from the comfort of their own home. This includes car deliveries, financing, insurance and more.

Meanwhile, eCommerce giant Amazon has started trialling checkoutless ‘Go’ stores, speeding up the shopping experience by eliminating the queuing process altogether. The days of waiting for a table at a restaurant are also over, as more people have grown used to booking in advance.

Hence, it’s important that we empower small businesses to remain competitive and provide them with the payment solutions to meet customer demand.

 

Global transformations

The digital payments revolution isn’t slowing down anytime soon. By 2026, only 21 percent of transactions will be made using cash.

The US might have been slow out of the gate, but it’s starting to see increased adoption of mobile payments. In-store mobile payments grew by 29% in the States last year alone.

This growth was primarily fuelled by Gen Z-ers and millennials. Latest projections show that there will be 6 million new mobile wallet users by 2025, with millennials accounting for 4 million of this figure. These two generations, the former in particular, have grown up with mobile banking.

For most Gen Z-ers, their first foray into financial services was with a challenger bank like Starling or Monzo. These banks are able to offer online features such as ‘split the bill’, fee-free withdrawals abroad and much more to cater to the modern financial needs of the younger generation.

The Middle East experienced similarly sharp increases in contactless payments. From 2019 to 2020, there was a 200% growth in contactless transactions. This shift towards a mobile-first economy in the region was inevitable; the pandemic merely accelerated this shift. A recent study showed that 80% of people living in the Middle East planned to continue using contactless payments post-pandemic, with speed and security being the main draw.

 

The future is mobile

As parts of the world now start to come out of lockdown, there’s an openness to new solutions and a widespread acceptance of new technologies.

It is now a case of when, rather than if, we’ll see a permanent shift to cashless in the future. For businesses, embracing digital innovation will be key to remaining competitive and keeping pace with consumer demand in this fast-changing payments landscape.

 

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HOW MERCHANTS CAN IMPROVE THE ONLINE PAYMENTS EXPERIENCE

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By Alan Irwin, Senior Director of Product at Global Payments UK

 

The dramatic increase in online shopping over the past 18 months has encouraged many businesses to invest in developing their omnichannel shopping experiences. The reasons vary – some are keen to capitalise on the trend of older shoppers migrating towards ecommerce and some are trying to make up for loss of sales in brick-and-mortar stores during the pandemic. It is also true that many businesses are shifting their models to sell direct to consumers to avoid high marketplace fees and are therefore building their ecommerce channels for the first time.

The checkout experience is arguably the most important and delicate part of the ecommerce transaction, as it can make the difference between a happy customer likely to return, and a shopping cart abandoned out of frustration and confusion. A survey from March 2020 suggested that 88% of online shopping orders were abandoned, i.e. not converted into a purchase. A seamless, customer-centric online payment experience is therefore critically important in ensuring completed transactions. But with so many payment providers available, what should businesses be looking for when trying to keep friction to a minimum?

 

Keep clicks to a minimum

Less touchscreen interaction equals less abandonment. Adapting the payment page to fit any device and supporting popular mobile digital wallets like Google Pay ensures a seamless, stress- and hassle-free checkout experience for the customer and keeps clicks to a minimum. Friction can present itself in the most minor features – for example, when the customer is navigating the payment form, the appropriate keypad should be shown to the customer when required. It’s much easier to enter a card number using the dial pad instead of switching between QWERTY keypad layouts.

Simplifying online forms with autofill and tokenisation also significantly reduces friction at checkout and shortens necessary time taken. Ensuring checkout forms are tagged correctly for “autofill” is a great way to offer customers a single-click to input the payment, shipping, and billing data that they have stored in their browser profile. Similarly offering a guest checkout option will help convert customers who are in a hurry or looking for a one-off purchase. This can also be achieved by offering to store the payment details (called ‘tokenisation’) for express repeat and one-click purchases.

 

Make it easy to understand

A tailored payments approach can increase both domestic and international global sales. By offering a checkout experience in the customer’s language, the option to pay in their currency of choice, and use their preferred method of payment (whether it’s PayPal, Alipay or card), businesses can build loyalty quickly and put customers at ease. It is equally important for merchants to ensure they always display simple direction and information about next steps to instil confidence and prevent customer drop-off. The customer should be informed of what is happening at every stage in the process, for example, whether they will proceed to SCA (Secure Customer Authentication) next or go straight through to completion.

In addition, validating forms in real-time means merchants can highlight potential errors to the customer early on, and payment providers should provide this functionality. This could be an invalid expiry date, an incorrect digit in the card number or incorrect CVV number based on card type. When issues are only flagged at the end of the process, this forces the customer to go back through the steps to figure out the error. Real-time signposting of problems removes this potential friction and reduces the potential for a declined transaction.

 

Ensure seamless security

Merchants should work with a payment partner who offers the right blend of security and compliance management without it coming at a cost to the end-to-end checkout experience for the user. Instilling trust and security in your checkout flow while utilising the right solutions to drive seamless authentication flows will increase customer confidence and help prevent drop-off.

The greatest level of security and control comes from either utilising hosted payment fields that the
merchant can natively integrate into their checkout flow, or a hosted payment page where they can
manage the look and feel. Showcasing your brand on the checkout page with trust signals and logos also adds to building trust with the customer.

Staying ahead of regulations is also important. Secure Customer Authentication (SCA) will soon be mandatory in the UK for all eligible digital transactions, and this doesn’t have to be a friction-full process. Tools like Transaction Risk Analysis (TRA) and Exemption Optimisation Service (EOS) can quickly score transactions and drive exemptions where there is the right blend of transaction risk.

 

The devil is in the details

These three rules for successful ecommerce checkout experiences may seem straightforward, but it is important to apply them at a micro level. It can take only one minor point of friction to cause a customer to abandon their cart, and this will inevitably be replicated across other similar customers. It is critical to identify friction points early on and anticipate customer needs throughout the process. Discussing these points and any opportunities to improve customer checkout experience with your ecommerce team and payment provider is an important first step towards ensuring your entire shopping experience remains competitively seamless and loyalty is won. It may be that your payment provider cannot address them, in which case it could be time to move on in order to stay competitive.

 

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