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Why the pandemic has put the pressure back on fintechs

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Ben Walker, Partner & CTO, Airwalk Reply

Traditionally, the only genuine threats to the incumbent banking giants were macroeconomic instability and direct competition from other industry leaders. However, over the past decade, their market dominance has been challenged by the rise of digitally native fintechs. Their innate agility, niche offerings, technical superiority and customer-centricity have allowed them to bypass the astonishingly high barriers to entry that have previously deterred new entrants.

As a result, the fintech venture ecosystem grew fast in the past decade, putting a new pressure on the incumbent banks.  Yet, perhaps surprisingly, that growth has slowed in the past few years. It may now be that the widespread financial volatility caused by the pandemic, Brexit and other political events has allowed the incumbents to wrestle back market power from the tenacious challengers that have been nipping at their heels.

So, has uncertainty encouraged people to revert to their trusted banking practices? Or should banks take this opportunity to finally invest in those long-needed digital transformation programmes or look to partner with and build alliances with their fintech competitors?

Ben Walker

Covid – a catalyst for change

Banks are highly aware of the technical debt they have accrued with their legacy software and systems, but, prior to Covid-19, many felt that the costs didn’t warrant the investment that a digital transformation would require. Despite the triple digit growth of fintechs, the number of customers actively engaged with them was still a small subset, so instead of embracing digital transformation, incumbents opted for patches and incremental improvements to their systems.

Then along came the pandemic – and more specifically lockdowns – which dictated a different way of working for most; consequently, small technical developments are no longer sufficient. A full technological overhaul is now inevitable.

The next generation customer base has different needs. They are more geographically mobile and driven by ease of access and digital interaction rather than human interaction. They don’t operate from 9-to-5. They want to consume services when it suits them. Banks have reacted to this by shutting 48% (4,735) of all of Britain’s bank branches since 2015. Digital start-ups tapped into the mobile culture early. They generally offer more convenience and better data-driven experiences. Customers can open a bank account and use their digital wallet within minutes, not days. Rapid innovation via microservice architecture and APIs gives digital banks great flexibility. By contrast, legacy banking platforms are complex, less agile, and more costly to run.

If legacy banks wish to compete with the digital-only banks properly they now know that they need to invest in modernising and integrating their back-end systems; not just focusing on the front-end, customer experiences.

Despite fintechs’ convenience and clear understanding of their customer base’s needs, there is still uncertainty around whether they can offer enough to fully convince people to turn their backs on traditional banks. Incumbents are able to tap into far superior resources to offer free overdrafts, mortgages, loans etc. As such, fintechs have broadly stayed in the ‘holiday spending’ space.

Partnerships – a lifeline for fintechs as well as traditional banks?

For banks, digital transformation requires an entirely different technology stack and a different type of architecture. It is more about building a full ecosystem than a platform. As a result, much of the narrative in the past few years has explored the potential benefits that incumbents could gain from partnering with digital-first start-ups due to their expertise with new technologies.

However, there is really nothing stopping banks from undergoing this transformation alone. So as changing consumer habits force the banks’ hands, now is the time for fintechs to seriously pursue forming partnerships with large banks. The window of opportunity for fintechs to form partnerships may be narrowing. Their previously attractive offer to help banks leapfrog to their expertise level is less enticing as incumbents proceed alone with their own digital transformations.

The pressure may indeed be transitioning back on fintech, so why should they seek out partnerships before the opportunity fades? Firstly, challenger banks, while nimbler, face a much higher chance of failure. They don’t have the luxury of government protectionism that is provided to incumbents that are vital to the economic health and prosperity of a nation. Fintechs also are more likely to operate with significant losses, opting to aggressively grow their platforms at the expense of profits. This has led to rapid customer gain, but this business model lacks a sustainable future.

Essentially, challenger banks have built some impressive digital experiences and have demonstrated that they capable of doing very well in retail banking, e.g., Starling. But this is not where the big opportunities lie. The cross-sell of other banking products (loans, mortgages, savings etc.) is the truly lucrative segment of the industry. On this front, fintechs, who often operate as single product shops, are unable to compete with the varied portfolio of incumbents. Furthermore, whilst challenger banks have shown a desire to scale up, they lack the knowledge of how to successfully do so. Incumbents, however, have ample experience in international expansion and dealing with regulatory authorities and jurisdictional challenges.

For now, the banking industry is at a crossroads for both fintechs and the big banks, with partnerships offering one solution to the problems that both sides face. However, in the wake of the pandemic, the ‘sleeping giants’ of the industry may begin to awaken and, if so, fintech will need to make their move sooner rather than later. Whatever happens, while banks and fintechs battle it out, the real competition lies in wait.  Tech giants, the likes of Google and Apple in particular, are poised to majorly disrupt the whole industry. So perhaps it’s time that the banking competitors dropped their shields and worked together to win in this brave new world.

 

Finance

Hey, Gen Y and Gen Z do you think you can retire comfortably?

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By Penelope Gregoriou, technical investment specialist at Alexforbes

 

Millions of South Africans rely on the money saved in their employers’ retirement fund to earn an income in retirement. For many people, this is their only formal savings for retirement. Unfortunately, too often, this money is still not enough to sustain them in retirement.

Being a young professional has its fair share of demands and complexities, with real day-to-day demands such as housing, transportation and health needs all perpetually competing for a share of

your wallet. Retirement savings, quite frankly, is a low priority for many. But research shows that it is critically important for young professionals to take responsibility in reaching a reasonable income in retirement – the sooner the better.

According to the 2021 Alexforbes Member Insights publication 65% of members aged between 20 and 30 are expected to replace and live on less than 60% of their final salary when they retire because they have not saved enough during their working lives. Consider this: if you had retired today, could you live comfortably on less than 60% of your monthly take-home salary? This is expected to drop even further below 60% due to low contributions and not keeping retirement savings invested when changing jobs throughout the remainder of working careers.

Research by the publication found that a retirement fund member who has actively increased retirement fund contributions by 0.25% each year since 2012 would have achieved a 2% increase in salary contribution rate by 2020. A small incremental increase such as this can lead to an almost 10% improvement in expected retirement benefits for younger members.

The need for better solutions

Penelope Gregoriou

The key underlying issues compromising pension outcomes are largely due to younger members:

  • choosing lower contribution rates to increase their take-home pay
  • having little or no access to relevant information
  • not clearly understanding what their options are at critical points in their financial journey
  • not knowing the long-term consequences of the financial decisions they make today
  • not having access to financial advice or financial counselling

There is mounting evidence that more people are realising how important the right information at the right time is and the long way it can go in supporting their financial journey and setting them in the right direction.

Digital member engagement solutions, financial wellness programmes and seamless in-fund and out-of-fund savings solutions all serve a valuable purpose in helping young members improve decision-making and the prospects of a more comfortable retirement.

Supporting this notion is the finding that 78% of retirement fund members want short-term and long-term financial planning (2021 Alexforbes Member Insights). It is clear that retirement funds cannot only be solving for retirement savings and income. Providing expert, holistic advice on retirement, group risk, health management, healthcare, investments, employee wellbeing

solutions and skills development can help members make the most of their long-term financial futures. More members are realising the advantages of having access to holistic solutions that provide them with personalised information, engagement and advice to make better, informed decisions today while still helping them plan for tomorrow.

Enabling the good and mitigating the bad

Retirement might seem like a far-off reality – especially when you’ve just started working – but it is still a reality. Your money competes for a lot of immediate priorities, but a long-term priority can only be met in the present. While you might often feel like you are on a seesaw of financial instability and discomfort, finding financial services that can provide you with a balance of pertinent products and solutions during critical times in your career – such as joining or leaving a company – can assist to preserve savings intended for long-term priorities, such as retirement.

Though there are challenges that come with being a younger professional, it does come with the significant benefit of time. As a younger investor in a retirement fund, you have a long-term investment horizon. Saving from an early age means that your money has more time to work for

you. Thanks to the impact of compound interest the amounts contributed in the early years of retirement saving add the most to your probability of a comfortable income at retirement. That is why it is imperative to maximise this opportunity as best and as early as you can.

You don’t have to do it alone

Employee benefits, and what they can offer employees, have evolved into solutions that are relevant and effective enough to guide members, especially during the critical moments earlier in their career and lives. Previously isolated benefits are now more integrated in employer-sponsored retirement funds to mirror the reality of members’ lives and accommodate their immediate and long-term needs, simultaneously.

An employee benefit provider can support employer-sponsored retirement funds with information and insights when reviewing the benefit design and engagement plans of their funds. The additional support that an employee benefit provider with an integrated and holistic offering can present can help members get over day-to-day hurdles – emergency savings, health needs, education – that could derail them in meeting their long-term retirement objectives. This could be something as simple as misunderstanding retirement benefits and the options at a member’s disposal. Helping members understand the total picture of what’s on offer, and what’s at stake, throughout their individual life journeys can go a long way in guiding better decisions at the right times to ultimately improve outcomes.

Starting a new job is a big change. You may need some help to make good decisions as you start your new job. Even small financial decisions you make now can affect your ability to reach your goals. You are planning for a critical time in the future. Ensure that you are getting the right foundations in place today, holistically.

This is the most opportune time as any to rethink how you have approached your employee benefits. Financial toolkits, like the newly launched My Money Matters portal from Alexforbes, offer members guided access to content that can help them better understand their retirement fund benefits and make better financial decisions based on their personal circumstances.

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Getting ready for VAT digitisation: automation is key

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Christiaan Van Der Valk, Vice President for Strategy and Regulatory at Sovos, says technology will power real strategic success for companies required to follow continuous transaction controls (CTCs).

A growing number of governments and businesses around the world are adopting digital-first approaches for a multitude of processes, resulting in a need to move away from traditional paper-based invoicing and embrace real-time tax reporting. This trend has been largely led by Latin American countries such as Brazil, Chile and Mexico. Through adopting real-time reporting via electronic invoicing systems, they have been able to better understand their economies, reduce fraud, and close VAT gaps.

The shift to continuous transaction controls (CTCs) allows transaction data to be automatically streamed to governments, reducing the need for resource-intensive business systems and document audits for tax administrations. Through the use of rich, standardised data, tax authorities are able to compute a business’s tax liability. Businesses are generally not required to be heavily involved in this process.

With this requirement – combined with invoicing – businesses would be able to avoid filing periodic tax returns, relieving them of the burden of running VAT compliance teams and filing reports that bring no benefit. The practice, however, calls for a more comprehensive data management approach and proactive data reconciliation across different sources of government-controlled transaction data. For this reason, companies need access to a high-quality dataset in case they must challenge government-determined tax liability.

It can be problematic to have poor data quality in a VAT environment that relies heavily on legacy reporting. For example, there have been instances in which reports were inconsistent or didn’t correspond to accounting data in audits. Consequently, fines or penalties may be imposed. However, in the world of CTCs the consequences of data quality issues are of a very different magnitude. Your financial and physical supply and demand chains can practically grind to a standstill if your data isn’t approved by the tax administration – especially in nations where the tax administration ‘clears’ the invoice in real-time such as in Italy, Mexico and Brazil.

Many businesses with responsibilities in VAT jurisdictions are missing something important here. Beginning to utilise automation and other more specialised tools for producing VAT returns is a critical step toward harnessing the benefits from the mandated transition to CTCs as opposed to focusing on the challenges.

Manual is outdated

A lot of businesses are still using manual processes like spreadsheets to manage their VAT compliance, which essentially involves the time-consuming production and submission of VAT returns.

Through implementing technology like automated rules in software, companies can maximise the validity of VAT data. As well as simplifying and re-risking VAT reporting activities, the effort required to design the steps to enhance data using automated rules engines means establishing structured definitions of ‘what’s wrong with your transaction data?’ These definitions can then be used to identify the cause of quality concerns in upstream business processes and address them in order to dramatically improve CTC readiness.

For many businesses, the majority of quality concerns are down to the manual and paper-based processes used in internal workflows and trading partner relationships. Therefore, automation will play a vital role in properly preparing for CTCs.

Preparing data in this manner for VAT enforcement means that a business is paving the way for a more data-driven approach to compliance in general. Companies will increasingly be required to coordinate data being submitted to tax administrations automatically from a range of business process and accounting systems, once CTCs and other VAT digitisation initiatives become operational.

Keeping up to date with the expanding scope of information that is handed over to tax administrations in these automated data transmissions is crucial, so that companies can maintain a level of control over the image of their business operations that is constructed for the tax authorities.

As well as this, a business may benefit from this insight across data encompassing the full supply chain and transactions.  For instance, this information gathered could be turned into tactics to help with strategic planning.

Business leaders may reduce expenses, boost resilience, and improve controls by automating tax and business operations and adopting a data-driven approach to compliance, allowing for a more accurate and detailed understanding of granular reporting needs.

Organisations should prioritise the building of dashboards utilising modern analytics tools to prepare for this huge transition. It’s also important to have a well-organised evidence base with clean digital archives. Technology and the insight it brings will be the driving factor for real strategic success as economies recover from the pandemic.

Data flow is key

As tax authorities and governments work to reduce VAT gaps, greater visibility into corporate databases is at the top of their agenda. This is accomplished through the government’s digitisation of all tax reporting, in which data is delivered at regular intervals that correspond to the flow of transactions and the government’s data requirements.

It is imperative that transaction data, relevant primarily for VAT purposes (though not exclusively), be received in a transactional manner. Meanwhile, other types of information, like payment data or inventory movement, may be requested on a weekly or monthly basis, whereas broader accounting data might be requested more frequently.

The introduction of CTCs should not be viewed as an IT formality, but as the first step in tax administrations gaining easy, timely and effective access to source data. The digitisation of tax will enable administrations to access data on a regular basis, as well as at a granular level.

As companies transition from manual data entry into this new world of automated data exchange, they should concentrate on why this change is important rather than how it is happening. The real prize here is not getting the ‘plumbing’ to work according to government specifications; focusing on this ‘how’ question means that companies may be missing out on a potentially critical business enabler, but equally they may be inadvertently setting themselves up for much higher levels of compliance risk.

With the introduction of CTCs and various forms of detailed digital reporting, companies should be prepared to be exposed to much more stringent audits. The reason for this is that data quality or consistency issues will gradually become more transparent to tax administration teams, which will increasingly be enabled to respond to even the smallest inconsistencies that may previously have gone under the radar with surgical precision.

The higher level of visibility allows tax authorities to cross-check more company data, its trading partners and third parties’ data. These abilities will be vastly improved as more governments complement CTC requirements with mandates for SAF-T and similar electronic auditing requirements. Through thorough analysis of this growing mass of real-time and historic data, a firm’s operations can be fully understood.

Successfully adapting to CTCs means investing in the journey rather than the destination. As everything becomes more digitised, organisations must stay on top of these changes and maintain the same level of data insights as tax authorities do. There will be a growing need for this as more countries introduce CTC regimes (both France and Germany are on the horizon).

Adapting business tools to deliver better data insights is essential to facilitating tax digitisation, both to satisfy global tax authorities and to achieve a competitive advantage in the market. In short, companies should remain fully alert and prepared to ensure a smooth transition and successful outcome of CTCs, which are the logical next step on the road to business transparency.

The domino effect of CTCs

The willingness of autonomous governments to accept digital tax reporting will determine how widespread its implementation becomes. Following more than a decade of success with these methods in Latin America, governments all over Europe, for example, have made major moves toward introducing CTCs. In doing so, there is a great deal of preparation that international companies need to do which can take a considerable amount of time and resources.

In all jurisdictions with indirect tax systems, moving toward increasingly digitised tax controls is the only path. With real-time data, governments can better understand and analyse their country’s economic health, while also enhancing fiscal controls and reducing fraud. It’s just a matter of time until these digital programmes become standard practice on a global level, as countries all across the world begin to recognise their success in reducing fraud, increasing efficiency and closing VAT gaps.

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