By Adam Prince, Vice President Product Management, Sage
A seismic and positive change is coming for the financial and accounting industries with the introduction of the European Union’s (EU’s) Payment Services Directive 2 (PSD2) regulation. The future of banking and payments is digital, and this regulation marks a shift towards creating a more secure and streamlined digital space for customers to make transactions. At its core, PSD2 heralds two major benefits; firstly, it will push innovation for today’s digital consumers, and secondly, it will give them more control over their data.
The benefits for banks are obvious: higher-quality banking data, faster responses to customer feedback, higher levels of security and reduced fraud. The picture is similarly positive for their customers: increased privacy rights and greater competition among financial-services providers leading to reduced costs and more flexible ways to bank and make payments.
PSD2 will help bring financial regulations up to date for a world that has gone fully digital. The many benefits of digital technology are long overdue in the finance and payments industry—and, indeed, we’ve already seen the rise of highly effective tools such as online banking and in-app management. PSD2 goes deeper, though—changing the fundamental culture that governs interactions between banks and their users. PSD2 is meant to make finances work for business, rather than the other way around. With that in mind, how will the regulation change working practices—and what do small and medium-sized enterprises (SMEs) need to do to ensure they reap the benefits?
How can PSD2 help SMEs?
Under the new rules, systems will be developed that will help SMEs to get a much clearer view of where their money is moving to. Cash flow is widely regarded as the biggest cause of insolvency among SMEs in the United Kingdom—the Federation of Small Businesses (FSB) recently noted that “80-90 percent of failures in the sector are due to poor cash flow”. As a result, it’s essential that they can track where their money is going and ensure that outstanding invoices are followed up. At present, tracking payment and banking details is a hefty administrative task, which means that it either drains valuable resources out of the business or, worse, ends up being left undone.
To address that issue, PSD2 mandates banks to provide APIs (application programming interfaces—essentially sets of interfaces that make it easier for one system to interact with another) to make deeper, automated integration possible. When SMEs’ information-technology (IT) systems can track payments on their own, providing reports on demand to keep their finance teams informed, staff can get on with pushing the business forward rather than chasing payments.
The UK’s Open Banking framework, which runs in parallel to the PSD2 regulation, also mandates that the nine largest banks must provide a single standard of APIs, so that if a company can interface with one institution, it can interface with them all.
SWIFT (Society for Worldwide Interbank Financial Telecommunication), the global banking-standards body, also announced in September 2019 its intention to mandate that all banks implement common standards under ISO 20022. This unified approach will reduce the number of technical and economic barriers stopping businesses from operating in the ways that work best for them—whether they want to work with a challenger or a retail bank.
Security is a priority.
This API-driven approach to banking will make life much easier for businesses, but it does come with its risks. Financial-data sharing must be done securely, or it could cost companies a lot more than admin time. To ensure the required level of security, PSD2 includes a set of Secure Customer Authentication (SCA) rules to guarantee that users can be authenticated and that APIs can be accessed securely via common standards. Essentially, this means that SMEs will need to use two-factor authentication to access their data.
The UK’s Financial Conduct Authority (FCA) has announced an 18-month migration period or “soft landing” for this part of the regulation to ensure banks and payment-services providers have the time they need to comply. So long as there’s a clear plan in place to achieve compliance, no fines will be levied if the APIs and SCA rules are not yet in place.
Interestingly, that need for security in digital banking across the globe can be seen in the differences between the ways in which the EU and Australia have approached their regulations. PSD2 is based on the premise that payments must be regulated to provide APIs—in other words, that banks need more supervision to ensure quality service. By contrast, Australian regulators are working on the premise that financial data is personal data, and customers should be able to access it free of charge—so banks must provide open APIs to make that access possible.
Both approaches end up at the same point from different ends of the scale. In both cases, the customer is at the heart of the regulatory change. As a result, SMEs stand to benefit hugely from increased control over their data and more connected, flexible services—but they must have the right tools in place to access those services.
Banking without the cloud is no longer an option.
If businesses are to get the most out of the new PSD2 regime, there is a clear need for cloud-based software to ensure that they can access all of the integrations available. If they don’t have the ability to import financial data, they’ll completely miss the benefits. The alternative is to carry on doing everything manually—spending lots of time completing reconciliation by hand, always working on cash-flow data that is out of date, missing customers who fail to pay and making avoidable manual errors.
Businesses that work with an experienced financial software provider also stand to benefit from assistance as the industry goes through the final rollout of PSD2. Most large banks have been ready for API integration and secure customer authentication from the September launch date, but some banks are a bit behind the curve, which may cause some businesses functional problems in the short term. It’s essential to work with a partner that can continue to make access to essential financial data available despite these growing pains.
PSD2 was developed for the benefit of businesses and individuals across Europe. We live in an era of unprecedented information exchange, and regulations such as PSD2 point the way to a more connected, user-friendly, flexible and intelligent way of working. Compliance with PSD2 will ultimately bring a host of benefits so long as the correct security measures are put in place—far from a burden, this is the start of a brave new world.
The future of finance
Such sweeping change always has its teething problems, and as a result, there are some practical issues that need to be addressed to ensure smooth running during the first months after the PSD2 deadline. For UK businesses that are working out how the changes will impact their processes, it’s essential to work with the right partners to ensure data transfer continues to happen as smoothly as possible.
It’s important that businesses don’t have to take on the full administrative workload of changing the way their systems work and comply with PSD2. By working with an experienced technology partner, companies can get full access to their usual functionality during the change and keep up to date with any further changes—without having to get into the nitty-gritty of APIs and authentication measures.
That partnership is something we take very seriously. At Sage, we have been working to ensure our customers are compliant with this regulation for a long time. Our priority is to help them navigate the changes, understand the impact on their businesses and guarantee that they can thrive as a result.
Although businesses are often reluctant to enact change, PSD2 will ultimately prove itself to be a positive piece of legislation. This change needs to happen given the prevalence of digital services in payments and banking, as well as the increasing demand from consumers for more bespoke and comprehensive services. If banks are quick to put plans in place, then the payoff will quickly be realised in terms of money saved and improved customer service.
IS PRIVATE PLACEMENT LIFE INSURANCE THE PERFECT PRODUCT FOR GLOBAL HNW FAMILIES
By Louis Zuckerbraun, Managing Director, GMG Insurance
Everyone wants to know that their family will be okay after they die and will do whatever they can to ensure that. That’s as true for high net-worth individuals (HNWIs) as it is for anyone else. But in an age where families are spread across the globe, leaving the kind of legacy you want can be incredibly complicated.
One product that could make things a great deal more simple is Private Placement Life Insurance (PPLI).
Originally conceived in the US, PPLI is rapidly gaining traction across Europe. Not only is it more efficient than traditional forms of life insurance, allowing the investments within the policy to hold many more types of assets and asset classes, it can also be a useful way to overcome specific issues such as management and control, beneficial ownership and substance.
While PPLI is gaining popularity across the globe, it’s still a relatively unknown product set, even among the HNWIs it would most benefit. It’s therefore worth looking at exactly what PPLI is.
Effectively an investment wrapped inside an insurance policy, a PPLI policy’s cash value depends on the performance of the investments within it. These investments can include hedge funds, mutual funds, and other potentially lucrative assets. Ultimately, it’s down to the policyholder to choose what kinds of investment they’d most like to have, meaning that they have a lot more freedom than they would with an ordinary life insurance policy.
Depending on the jurisdiction, a PPLI policy can also provide significant tax savings. In the US, for instance, the Internal Revenue Code treats insurance differently than it does investments. So, by packing an otherwise taxable investment in a tax- free policy, investors can reap big rewards on the investment, as well as the death benefit, tax-free.
But PPLI policies aren’t just beneficial from a tax perspective, they’re also useful for anyone with a global family.
A PPLI policy is generally by nature a globally focused vehicle. So, for instance, approved banking partners and advisors in Switzerland can work with US persons, to provide an investment vehicle that has a global focus.
The policy would purchase global funds and be managed by a global advisor who is outside the US but understands the US market. This makes it perfect for anyone who wants to diversify from traditional United States Dollar denominated investments but wants to maintain tax compliance and work with international advisors.
This solution works very well with a global family who may have, as an example, a child studying in London, or with international businesses, and who wish to build exposure globally in a tax efficient and US compliant manner. An international PPLI policy would be very beneficial to the family.
Further, the policy can be denominated in Swiss Francs, US Dollars or Euros depending on the needs and strategies of the policy owners or beneficiaries and still pay tax efficiently to the US persons.
These features also mean that a PPLI policy can be a useful replacement for, or supplement to, a family trust, especially if a tax authority is unlikely to accept the trustees as the legal owner of the assets held in the trust.
A clear choice
With more and more families living in different geographies, a PPLI policy is therefore an option that should be playing a much bigger role in the mainstream. It provides an accepted and compliant solution to the planning challenges faced by ultra-high net worth and high net worth families.
While life insurance, in general, provides a mechanism for estate tax planning, asset protection and investment flexibility that cannot be beaten by any other compliant tool, PPLI provides the flexibility and protection that informed high net worth families increasingly require.
If you’re looking a purchasing a PPLI policy, however, it must be managed by professional insurance and legal advisors who understand the product.
FINTECH IN AFRICA: WHY THIS MUSTN’T BE A DECADE OF WASTED POTENTIAL
Albert Maasland, Chief Executive Officer at Crown Agents Bank
The current COVID-19 pandemic is an unprecedented crisis of our times. As with many global disasters, emerging and frontier markets are likely to feel a devastating impact. The Institute of International Finance has already reported the largest capital outflow from emerging markets ever recorded. The extent of the effect is being debated, but efforts to reduce the impact must become an absolute priority.
One of the most important things we can do in the long term is remember how far these regions have come in the last few years and remind international players of their enormous potential. In 2019, technology startups that operate on the continent received a total of $1.3 billion in funding. Investors and financial services players alike have observed the considerable growth and adoption of fintech in Africa. Fintech is one sector that could show resilience during this crisis, as online services become essential and the use of cash is discouraged worldwide. Africa has seen its fintech industry develop and thrive of late and this must not be overlooked as we look to the future.
The fintech ‘hub’bub
According to the GSMA, Sub-Saharan Africa is still the “enduring epicenter of mobile money”. The region accounted for over 60% of the $690 billion that was transacted via mobile money in 2019 and has more than 150 million more registered accounts than the next highest region, South Asia.
The market conditions that make Sub-Saharan Africa so ripe for the adoption of mobile money range from the population being predominantly young and tech-savvy to an established history of not having sufficient financial infrastructure. Mobile wallets have brought better security and the ability to make international payments to the unbanked. Investors noticed.
Fintech became Africa’s best funded startup sector in 2019 as venture capital aimed to support and capitalise on the huge potential for growth. Visa, Worldpay and Mastercard are among those global financial players who have entered into collaborations with African fintech ventures, such as B2B payments company Flutterwave.
While Kenya saw the birth of M-Pesa, more countries are embracing fintech and becoming hubs on the continent. Nigeria saw the highest number of startup deals last year and startup investment grew nearly five fold compared to 2018.
E-commerce, financial products for SMEs and payments technology are among the areas receiving funding. As entrepreneurialism receives more support and international attention in Africa, the gaps in financial systems are being plugged.
Changing the definition
With all these developments and emerging services, traditional measurements of financial inclusion have needed to adapt. Financial inclusion metrics have previously been based on the number of adults with a bank account at a financial institution. According to the Global Findex from the World Bank, the share of adults with an account at a financial institution rose by 4 percentage points from 2014-2017, while those with a mobile money account nearly doubled—to 21%.
Mobile money accounts or mobile wallets are now a fundamental part of financial services in Africa. For investors and entrepreneurs, that translates to more information about the market, behavioural data about consumers and e-commerce possibilities. In essence, it amounts to opportunity.
These benefits also become apparent in international aid and charity work. It’s easier than ever for international development organisations to get funds directly to their aid workers and to individuals who need them safely. Remittances last year, which reached $550 billion, were three times that of official global aid volumes. 80% of these transactions were made to emerging markets, and the minutes and pennies saved in each transaction through the efficiency of mobile payments are invaluable to those most in need of these funds.
As financial inclusion makes great strides and financial technology has transformed the African startup landscape, we must not lose this progress. We must continue to value the benefits in bringing those excluded into the financial ecosystem and the unique opportunities presented in areas like Sub-Saharan Africa.
We’ve seen what real innovation looks like in the tangible changes fintech has had in Africa: doing things differently and creatively to improve the status quo. Investors should continue to watch and support these markets, and the financial services industry more widely should take heed of the lessons learned in the markets we too often believe to be behind us.
In the coming months, the importance of digital services and fintech in particular will become more palpable. Nigeria’s tech scene is already beginning to contribute to efforts to combat the COVID-19 pandemic. Africa was poised for an impressive decade and we must do what we can to remember and realise the potential of the world’s youngest population.
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