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The Silver Lining of the Baltic Banking Crisis

baltic

The Silver Lining of the Baltic Banking Crisis

The continuing revelations as to the extent of money laundered through Baltic banking systems, most notably the dramatic accusations against Danske Bank (which are now pulling in Deutsche Bank as well) were an unfortunate blow to the Baltic states’ reputations as dynamic and safe markets for foreign investments in Europe. However, substantial media scrutiny and the public and private sector response may actually result in a safer financial environment for investments and business operations in Estonia, Latvia and Lithuania as well as an improved EU structure to deal with money-laundering.

A Series of Money-Laundering Failures brings Global Scrutiny to the Baltics

Danske Bank, the headlining financial institution at the heart of the massive $280 billion money-laundering investigation, has already pulled out of Russia and the Baltic States as a result of its misadventures in the region. Other banks, however, were also caught laundering funds from Russian, Ukrainian, Chinese and North Korean sources in the last few years, including Swedbank.  Although the majority of the scandal has been laid at the feet of Estonian and Latvian banks and financial oversight bodies, Lithuania has not survived unscathed and ongoing investigations will likely expose additional breaches in finance laws and EU and U.S. sanctions regimes.

While the scandal has put a dent into the business reputation of Estonia and Latvia, the resulting scrutiny and investigations are likely to improve transparency in the region and improve legal regimes and oversight structures for international business operations moving forward.  The heightened focus on anti-money laundering (AML) tools has also spurred tech innovation, leading to the creation of critical private-sector expertise to help consumers and businesses identify and fight money-laundering activities.

Exposing the Weakness in EU Mechanisms

The scandal exposed not just national-level problems, it highlighted an EU-wide gap in AML mechanisms. The decentralized nature of AML regulation and the lack of coordination amongst country regulators and oversight bodies across the EU provides opportunities for abuse. Lack of formal channels of communication, inter-agency / regulator dialogue and cooperation weakens the overall ability of any one country to effectively share information, pool resources and fight trans-national financial criminal activity.

Additionally, integral to the EU’s current challenges has been the deficiency in adoption vs. implementation. Larger EU states such as France and Germany traditionally maintain sufficient financial and human resources to not only transpose EU AML Directives into local legislation, but to ensure effective implementation. Scarcity of expertise, limited capacity and shortfalls in funding among smaller states such as Cyprus, the Baltic states and Malta, on the other hand, have hindered the effectiveness of resulting oversight processes and procedures to reduce money laundering. There is a growing recognition as to this weakness in the system, and a recent joint proposal from finance ministers of France, Germany, Italy, Latvia, the Netherlands, and Spain to create a centralized anti–money laundering (AML) supervisor with EU-wide authority may help to close this gap.

Finally, the anonymous nature of cryptocurrency and digital assets have made them attractive to illicit users interested in perpetrating money laundering and terrorism financing. Their use in recent cases has exposed the need throughout the EU for further innovations in their regulation and oversight to ensure transparency, accountability and legality of digital asset transactions.

In response to these challenges, the EU has adopted the 5th Anti-Money Laundering Directive which is required to be transposed into local law by Member States by January 2020. Although transposition into local law is required by January 2020, the key to determining the success of this legislation will be dependent upon the resources and ability to implement. Strong centralized technical support, human and financial resources should be provided – especially to smaller Member States – as they work to locally adopt and transform these concepts into practice.

The Revelations have Spurred Innovation

Concerns over money laundering have forced the government to take action (albeit rearguard in nature) but have also sparked concern from the business community, which is equally concerned about the stability of the national and regional financial system. Taavi Tamkivi, CEO of Salv, the Estonian AML-focused start-up funded by Transferwise and Skype employees, noted that although the incidence of such AML cases in Estonia is disappointing, the fact that they were brought to light speaks to the Estonian commitment to transparency, accountability, and responsibility. Recent scandals have brought into the open the weaknesses in the Estonian system and instead of hiding these scandals or shirking responsibility, the Estonian government, regulators and private sector have come together to learn from these investigations, strengthen their systems and develop world-class systems of AML. Tamkivi went on to note that Know Your Customer (KYC) efforts and risk profiling of new clients are important but must be coupled with monitoring the millions of transactions flowing through financial institutions every day for suspicious behavior.

Additionally, data sharing between and amongst banks and the government is needed to ensure comprehensive understanding and communication of suspected criminal activity. The only way to undertake such intensive oversight is through innovations in technology. Tamkivi noted that “Estonia is known for its e-residency and digital-centric culture, so I’m confident we can find smarter ways to share and use the data we all have; protecting individuals, but catching more criminals. With the right technology, we can really solve it.  Moving fast is the only way to keep up with the innovative organized criminals moving millions or billions around the world.”

Tamkivi went on to share an important aspect of the Baltic business environment which highlights the resiliency and affinity for innovation: “You can think of the Baltics nations, in many ways, as country-sized startups. We witnessed the mistakes and pitfalls of long-established nations from afar and, when we gained re-independence in the early 90s, we were able to start afresh. So, if you take a close look, you’ll find a dense web of fresh ideas and innovation woven into our structures. Sometimes, like Skype, TransferWise, and Bolt they do manage to kick off a profound change in the world.”

The Baltic Region Represents some of the Best Locations for Business Expansion in Europe

The innovative atmosphere that gave rise to tech companies such as Skype and Transferwise, vaulted Vilnius into the position of number one startup city for tech in the world, helped to launch the NATO Cooperative Cyber Defence Centre of Excellence and has all three countries listed in the top 20 for innovation globally by the World Bank Group is an astounding opportunity for foreign investors.  But the technology sector is not the only attraction to the Baltic economies.

According to the World Bank Group “Doing Business” assessment of jurisdictions, Lithuania, Estonia and Latvia rank 11th,  18th, and 19th respectively and all three rank highly on global lists for innovation, safety and quality of life.  The business-friendly nature of the Baltic countries coupled with their attractive cost of living provide a natural advantage in attracting a wide variety of global businesses. In 2018, Lithuania, Estonia and Latvia each outperformed the estimated EU hourly labor costs for the EU-28.

Closing the Gaps in the System

Estonia, Latvia, and Lithuania need to take quick and decisive action to prevent money-laundering in the future, as does the EU, which is facing similar problems in banking systems in Malta, Cyprus and other member states.  But while the Danske Bank scandal is a black mark on the region, a robust response to these concerns by governments and innovative private companies such as Salv and others will ensure that the thriving Baltic market becomes an even more attractive location for foreign investment projects by reducing investor exposure and political risk concerns.  As Taavi notes ‘…though many of the recent negative headlines came from Estonia, that may not necessarily be as bad as it first appears. Everyday Estonians are notorious for their commitment to transparency, and taking responsibility for mistakes. And, honestly, now that scandals are out in the open, we can all learn from the investigations. I wouldn’t even be surprised if, as a result, Estonia then grows some of the greatest AML experts in the region.”

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Gabriella Kusz, CPA is an international economic and financial sector development expert with experience in the areas of financial sector strengthening, governance, and regulation.  Ms. Kusz has held senior-level positions at the World Bank Group as well as with the International Federation of Accountants. 

Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company which offers market research, political risk assessment, and international negotiations assistance.  Mr. Samson is a former U.S. diplomat and international law advisor.

technology

The Surprisingly Long Life of Wire Technology

Those of us in dynamic, fast-paced industries have gotten used to keeping our eyes trained forward. We’re always exploring innovations—ways to evolve our processes and make them as efficient as possible. Technology grows at such break-neck speed that adults of any age can look back and marvel at the changes they’ve witnessed in their lifetimes. But surprisingly, many of these technologies aren’t actually new. In fact, most of our modern financial workflows have evolved from processes that are older than living memory. Cool, right?

As we ring in the new year, let’s take a step back and reflect on the origins of a very familiar process to many of us: wire payments, and the subsequent introduction of electronic funds transfers.

Humble Beginnings

Wires, direct deposits, and electronic funds transfers (EFT) have roots in the invention of the telegraph; a tool used in the United States from 1844 until 2013 (some areas of the world still communicate by telegram today).

The telegraph is the catalyst for all modern means of communication. It’s arguably one of the most pivotal inventions of Anno Domini, and it forever changed the speed at which critical information could circulate in and among developed countries. Instead of waiting weeks for mail to arrive by ship, train, and pony express, messages would take only hours to arrive. It was as pivotal to its contemporaries as the Internet is to us.

The invention of the telegraph came just after the first Industrial Revolution, in 1844, when Samuel Morse sent the first telegram from Washington, D.C. to his partner, Alfred Vail, in Baltimore, Maryland. The message: “What hath God wrought?”

Just over a decade later, preparations began to lay the Transatlantic Telegraph Cable across the seafloor—but the project took several years to complete. The first two attempts failed after the cable—made of copper wire wrapped in tar, hemp, and steel—snapped and was lost irretrievably lost at sea. The third attempt, completed in 1858, finally connected the two continents from Newfoundland, Canada, to Valentia Island in Ireland.

After a test message (“Glory to God in the highest; on earth peace, good-will towards men!”) successfully transmitted between the engineers, Queen Victoria and President Buchanan exchanged lengthy congratulations. The Queen’s message—the less flowery of the two, comprised of 99 words with 509 letters—took an exhausting 17 hours and 40 minutes to transmit by Morse code. This may seem lengthy by today’s standards, but at the time, the fastest means of overseas communication was by ship. Eighteen hours was staggeringly fast.

Success was short-lived. The power used to send the first messages was too much for the cable to withstand, and it corroded and fell silent within the first three months. Intercontinental silence ensued until 1866—two years after the American Civil War ended—when efforts to replace the cable began.

Despite the many initial setbacks, the telegraph became a beacon for human invention. It transformed not only the means but also how we spoke to each other. Telegrams were very expensive and usually reserved for affluent patrons and emergencies. Because of the high cost, telegraph companies encouraged senders to ditch the elaborate salutations of the day for succinct (cheap) messages.

For example:

-Sending a ten-word message in 1860 from New York to New Orleans cost $2.70—about $76 in 2018.

-Sending a ten-word message to England around the opening of the Transatlantic Telegraphic Cable would have cost around $100—just over $2,930 in 2018.

Because the prices were out of reach for most middle- and lower-class families of the day, physical mail remained the primary means of communication. This resonates with today’s concerns about the potential expense of newer technologies. The inventions of the telephone and the radio also likely contributed to the telegraph never becoming a common household item. Even so, it still had more to give to society—businesses found another use for this groundbreaking technology.

Incorporating the Telegraph into Bank Processes

The first funds moved via wire in 1872 when the Western Union opened a system to transfer up to $100 (about $2,120 in 2018) at a time. According to Tom Standage in his book The Victorian Internet: “The system worked by dividing the company’s network into twenty districts […]. A telegram from the sender’s office […] confirmed that the money had been deposited; the superintendent would then send another telegram to the recipient’s office authorizing the payment.”

This was a rudimentary, time-consuming process, but still similar to modern operations. It took a while for the concept of non-physical fund exchanges to catch on. Standage writes: “One [person] went into a telegraph office to wire the sum of $11.76 to someone and then changed the amount to $12 because [they] said [they were] afraid that the loose change ‘might get lost traveling over the wire.’”

Stepping into the Modern Age

The transition from telegraphic methods to EFT is somewhat obscured. The first mentions of direct deposit appeared in 1974, just over 100 years after the first wire payments transmitted via telegraph. Newspaper ads like this one in Florida’s Ocala Star-Banner promoted services for “Direct Deposit for Social Security,” which deposited Social Security checks from the government to individuals.

Even EFT payments initially met with some trepidation. In a 1976 article in the Ocala Star-Banner entitled “Computer Money System… Would You Bank On It?”, Louise Cook writes that the banks favored electronic means in order to limit the expensive manual paperwork they had to maintain.

Sound familiar?

When reading through old articles about initial EFT processes, I was struck by how many of the same arguments exist today against switching entirely to electronic procedures.

In Cook’s article, she broke down the cost for banks to maintain physical processes at the time. Banks were processing around 27 billion checks annually for 32 cents a check ($1.45 in 2019). They stressed that EFT was crucial to sustaining their businesses.

A separate 1977 article by Sylvia Porter in The Southeast Missourian entitled “Checkless society,” discussed her concerns about EFT payments. Some of the concerns are very dated. For example, Porter argued that disputes over electronic transactions at restaurants would require lawsuits to resolve. These days, banks frequently handle disputes on behalf of their clients and refund them up front. Other arguments, such as the value of float for companies, remain valid today and are resolved by fintechs.

Same Song, Different Decade

It’s the 21st century, and electronic payment options are already aging—wire transfers are almost 150 years old! Yet companies still struggle to get fully automated processes off the ground. Where is the disconnect?

There are several possible contributors, which include:

Perceived cost. Sending funds electronically is cheaper than ever, but checks now cost around $3.00 each. This equates to roughly 65 cents in 1976—a 106% increase from the original 32 cents (without even accounting for inflation). Despite the reduced cost of electronic payments, the transition, training, and scaling concerns are enough to make most companies too nervous to act. Payment solution providers ease this concern by offering fast implementation, logical user interfaces, andskilled support teams.

Smaller vendors still ask for checks. Checks won’t become obsolete until companies stop requesting them, which is unlikely—at least for now. Many smaller companies typically run their businesses on familiar, outdated processes. Vendors know everyone at their bank, and frequently pay their employees through paper processes. Even so, their business choices don’t need to affect the way your company handles AP. Fintechs like Nvoicepay offer pay file submissions, which enable AP teams to issue payments electronically. Then Nvoicepay disburses the funds in the vendor’s preferred format (credit card, ACH, or print check) without you having to chase down a single check-signer.

Security concerns. Payment fraud instances are more common than ever. Handing some control to a payment partner can be intimidating, especially if you’re not sure that partner is taking fully protective measures for your company. During the research process, be sure to ask prospective payment solution providers whether they will cover you for any issues that occur.

Looking Forward

What can we learn by looking back? Aside from gaining a healthy appreciation for our roots, reflection offers a great perspective on the future of modern AP processes. It highlights the fact that we haven’t changed all that much. Rather than introduce new concepts these past 150 years, we have refined and modernized existing operations.

If you’re researching ways to economize your back-office processes, but all the new-fangled technology sets you on edge, take heart! You may be surprised at how familiar this new technology feels because it isn’t really new at all—it’s evolved.

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 Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

payments

How to Make the Case for Optimizing Invoice Payments

What I’ve learned working in sales for a bank and two financial tech companies is that when it comes to payments, there is a clear difference between fintechs and banks. Banks look at business payments as a product, while fintech see them as a process to be optimized. 

What does that really mean? Optimization is a term we throw around a lot, usually in relationship to costs or processes. Costs are relatively easy to optimize, because they’re easy to see and measure. The business case is simple to make.

Making the case for process optimization is a lot harder, however, because the costs are hidden and hard to measure. And when we get really good at running a process, we no longer realize just how complicated that process really is. We’ve got something that’s working, so we keep doing it the same way. If we think about optimization at all, we look at pieces of the process and see if we can make them faster or cheaper. But then we often overlook new technology that can radically change or even eliminate part or all of the process. 

A serious dent

For example, smart phones have radically changed and/or eliminated the use of alarm clocks, radios, landlines, paper calendars, cameras, feature phones, weather reports, and more. Those all still “work,” but why have all those different pieces and processes for each when you could have a smart phone? 

Few people, if any, make the effort to figure out how much time and money they save by switching to a smart phone having all that functionality in a single portable device. You’d have to add up the hard costs, break down each process into its component parts, and then assign a value to the time you spend on each. No one would do that, because by now just about everyone realizes that smart phones offer a faster, easier, more convenient way to do things. But that’s exactly what you have to do to make a case for changing a business process.

To make the case for optimizing the B2B payment process, you need to evaluate three key areas: 

Transactional costs. This seems pretty straightforward: what does it cost to send an ACH or wire, or print and mail a check? This cost includes transaction fees, check stock, envelopes, stamps. But there can be additional fees for delivering standard or upgraded remittance information, PositivePay, returned checks, and research on lost or erroneous ACH payments. Be sure to consider all of these when making your business case.

Rebates. This also seems straightforward: how much spend can you get on card, and what’s that likely to yield in rebates? But there are some nuances. First, not all rebates are the same—they vary in terms of rules and payout percentages. Some rebates don’t kick in until you hit a certain threshold, while others pay out monthly, annually, or semi-annually and you must figure in the time value of money as well. Others pay less if you don’t choose to pay your balance off daily or weekly. Then there are exceptions like Level 2 and 3 processing and large ticket charges. I would suggest taking a look back at previous years to see what you actually earned vs. what you remember from the sales pitch.They are often vastly different.

Operational efficiency. This is where you can get sucked down a rabbit hole. But it’s also where you can really transform your business. Let’s take a look at all the pieces of the payments process:

Enabling suppliers for electronic payments. What does your go-to-market strategy look like?  Is it phone calls, mailers? Does your AP team participate?  Your procurement team? How many vendors accept card? ACH? Who collects, keys in, and updates the banking information? How is it secured? 

Creating payment files for transmission. How many different file types must IT work to create and test, and how often are you sending? How long does it take, and who does it?  Is the approval built into the system? Or is it manual and paper-based?

Collecting physical signatures on checks. How many people are involved? How much time do they spend? What is their hourly pay rate? 

Sending out remittance advice. Is it stuffed in envelopes and mailed? Emailed? Is it automatic or do you need to create, save to desktop, and manually send?

Fielding phone calls asking about payments. How many calls do you get per 100 payments sent? What’s the average time to fulfill a request? Who’s involved, and what’s his or her pay rate?

Tracking down and reissuing lost or erroneous payments. What’s your error rate per 100 payments sent? Who fixes errors, how long does it take on average, and what is his or her pay rate?  

Early payment discounts.  How often are you able to take advantage of terms offered by suppliers? What is the lost revenue opportunity when the payment process causes you to miss out?

Late payments. How many payments are late? How much are you paying in late fees? What is the effect on your discount and vendor relationship when payments are delayed?

Updating supplier banking and payment information. According to Nvoicepay internal data, suppliers change their banking setup about every four years, meaning you’re updating 25 percent of suppliers annually. But in this day and age, you can’t just accept supplier updates at face value. You have to validate those requests to make sure it’s not fraud or phishing. Who handles that, how long does it take, and how much do they get paid? Do you have a liability policy for fraudulent payments? What has fraud cost your business historically?

Escheatment and unswiped cards. This is the time spent following up on uncashed checks or un-swiped card payments and reissuing them and/or reconciling them back into the accounting system.

How much does it all add up to? Very few organizations really know. There are benchmarking studies out there on the costs of writing checks, and of processing invoices. But no study I have seen recently considers the entire process, beginning with supplier enablement and ending with a reconciled payment. 

Processes and sub-processes

Those detailed studies don’t exist because it’s difficult to discern how much time an AP team spends on all the required processes and sub-processes for completing a payment. Those task hours are often dispersed across the team and can be tough to measure. 

In accounts receivable, for example, there are staff members that only do cash application. So if you make your cash application process 70 percent more efficient, and you have a headcount of 10, it’s easy to say “Okay. I can assign a savings number to that and reallocate 6 or 7 people.”  It’s pretty straightforward.

That’s much more difficult to do on the AP side. For most companies, no role within AP focuses solely on handling errors, enablement, fielding phone calls, or escheatment. Team members need to be pulled from other duties to cover those tasks. I’ve even seen teams pull staff from the manufacturing floor to stuff envelopes during Friday check runs. It’s hard to adequately quantify the time that goes into all these components, let alone understand all of the costs that roll into the payment process. And why would you if you think your method works and there are no viable alternatives? 

The Fintech A-ha

There is a better way. Over the past decade, fintechs have made steady progress in optimizing the B2B payments process. Payment automation providers can now offer a single interface for all payment types, eliminating the need for multiple payment files.

Some, like Nvoicepay, use cloud networks to handle supplier enablement and information management securely at scale, taking those tasks off of AP’s plate. We even service the payment on the back end, handling incoming calls and error resolution. 

The combination of technology and services radically changes the process, eliminating some of AP’s most time-consuming and unproductive tasks, and freeing up staff time for higher-value work.

And that’s the fintech difference. Slowly but surely, technology companies have surveyed the fragmented financial services landscape and figured out how to knit processes together to replace complex, repetitive, non-value-added manual activities with a few button-clicks. To truly optimize business payments, you need to look beyond stamps and envelopes and consider the entire payment journey. Only then can you truly understand the massive optimization opportunity in front of you. 

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Kristin Cardinali is the Vice President of Enterprise Sales in the Midwest Region at Nvoicepay. Her experience in sales and sales leadership spans 16 years, and includes positions held with companies like Capital One and Billtrust. With Nvoicepay, she delivers scalable payment solutions to enterprise companies and other large organizations. Kristin has received several accolades, including Sales Rep of the Year & Quarter, and multiple President’s Awards.

marco polo

Marco Polo Network Welcomes BNY Mellon

The Marco Polo Network, a trade and working capital finance network powered by blockchain technology, welcomed The Bank of New York Mellon (“BNY Mellon”) onboard to conduct an evaluation program. BNY Mellon’s collaboration is aimed at developing a more open and connected trade finance environment that powers global trade and economic growth.

Marco Polo is a consortium working to make international trade more efficient. The network includes financial institutions, their corporate clients, service providers and the blockchain technology firms TradeIX and R3, leveraging R3’s Corda blockchain.

By engaging with Marco Polo, BNY Mellon is positioning itself to explore trade financing powered by blockchain, in an industry where many participants still rely on costly and inefficient paper-based systems to conduct trade. 

“We recognize tremendous potential to harness digital, data and advanced technology capabilities to transform essential trade finance processes to make them more efficient and secure. Collaborating with Marco Polo members is one more measure of our commitment to provide innovative opportunities to improve the client experience throughout the transaction lifecycle,” said Joon Kim, Global Head of Trade Finance at BNY Mellon. “To achieve our goals, we seek to work with forward-looking organizations, like the Marco Polo Network, that are harnessing digital to truly transform industries,” he added.

The move reflects BNY Mellon’s focus on fully digitizing the business to deliver new capabilities faster, unlock the power of data and put clients at the center of their ecosystem. BNY Mellon remains dedicated to broadening the scope of its digital ecosystem both by actively advancing its own products and services as well as seeking opportunities to collaborate with best-in-class external companies. 

Already strong in Europe, Asia and the Middle East, the Marco Polo Network now bolsters its U.S. presence with the addition of BNY Mellon. “We are accelerating the network’s growth and reach while our members are preparing and running programs with their corporate clients,” said Daniel Cotti, Managing Director, Centre of Excellence, Banking & Trade at TradeIX. 

 BNY Mellon joins Bank of America, BNP Paribas, Commerzbank, ING, LBBW, Anglo-Gulf Trade Bank, Standard Chartered Bank, Credit Agricole, Natixis, Bangkok Bank, SMBC, Danske Bank, NatWest, DNB, OP Financial Group, Alfa Bank, Bayern LB, Helaba, S-Servicepartner, Raiffeisen Bank International, Standard Bank, Intesa Sanpaolo, MUFG, National Bank of Fujairah PJSC, National Australia Bank, and Bradesco as a member of the largest network of financial institutions leveraging blockchain for trade finance.

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About BNY Mellon

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries. As of Sept. 30, 2019, BNY Mellon had $35.8 trillion in assets under custody and/or administration, and $1.9 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.

About TradeIX 

TradeIX, is an award-winning technology platform provider driving innovation and driving change in facilitating the flow of goods, money, and credit in the $8 trillion trade finance market. Its TradeIX Platform is delivered to banks and their corporate clients via ERP-embedded applications. The TradeIX Platform is integrated with the Marco Polo Network, the world’s fastest growing trade finance network.

Some of the smartest financial institutions and companies in the world work with TradeIX, including ING, BNP Paribas, DHL, AIG, Oracle, and many other Fortune 500 companies from various industries. TradeIX is headquartered in Dublin with offices in London, Kettering and Singapore. For more information visit: www.tradeix.com

About R3

R3 is an enterprise blockchain software firm working with a broad ecosystem of more than 300 members and partners across multiple industries from both the private and public sectors to develop on Corda, its open-source blockchain platform, and Corda Enterprise, a commercial version of Corda for enterprise usage.

 R3’s global team of over 180 professionals in 13 countries is supported by over 2,000 technology, financial, and legal experts drawn from its global member base. 

Learn more at r3.com.

intermediary banks

Connecting the World: The Importance of Intermediary Banks

Whether you are initiating electronic international payments through a fintech solution or buying physical currency, the chances are high that a bank will be involved. The relationship between banks, as well as the role of intermediary banks, often eludes the general public, who are content with the process as long as it works.

However, understanding how the sausage is made can provide valuable insight into the way you conduct your business. Let’s take a closer look at intermediary banks and their subsequent relationship with currency exchange.

What is an Intermediary Bank?

In layman’s terms, an intermediary bank is where funds are transferred prior to reaching their destination, the payment bank. 

To transfer money, banks must hold accounts with each other in the same way that a typical client would. However, there are too many banks for one to hold accounts with all the others, so instead, they strategically choose where to open accounts. The result is a fragmented network of financial institutions. 

When a bank needs to send money to a location where their bank does not hold an account, the bank instructs an intermediary bank to act as a “middle man” to pass on the funds on their behalf. Funds can transfer between multiple intermediaries, especially if one of the banks is not networked with many larger banks. If the payment bank is across an international border, the intermediary bank may also act as the currency exchange provider.

The Role of Currency Exchange

Currency exchange refers to the use of one currency to purchase the same value in another currency. It’s required any time one entity wishes to pay another in a currency different from their default option.

Each country has either a “fixed” or “floating” exchange rate. A “fixed” exchange rate—also known as the “gold standard”—means that all the country’s money has a physical equivalent in gold or another precious material. “Floating” exchange rates may not have a physical worth, but are influenced by the market and politics, as is currently the case with the Great British pound’s relationship with Brexit.

Breaking Down the Cost

For businesses, currency exchange is vital to a true international payment process. Some vendors may wish to be paid in their customer’s default currency, which would not warrant an exchange. U.S. businesses may experience this when working with vendors in countries like China or Japan, who often prefer payments in USD. This happens when a vendor finds it cheaper to open accounts specific to currencies other than their own in order to avoid exchange fees.

Some vendors have opened multi-currency accounts, which enable vendors to accept and store more than one currency in a single account. Because this method is still gaining traction, it’s good practice to ask if vendors have multi-currency accounts before sending them money. If they don’t, and their account cannot support your currency, the payment bank will likely reject the funds.

Other hidden costs to consider when working with international payments are:

The exchange. If your origin currency is weaker than the payment currency, your money may lose some value in the trade. However, the market is continuously shifting, so the exchange will also gain value at times. The more international payments you make, the likelier that this cost will even out over time.

Intermediary bank fees. Some intermediary banks shave off a fee for their services, which is usually taken from the sum – the net amount is deposited into the vendor’s account. Not all intermediary banks will charge this fee, and it’s not immediately obvious which banks will do so.

Payment bank fees. Similar to the intermediary banks, certain payment banks also charge a fee for processing international payments. Again, not every bank charges this fee, but those that do will deduct it from the payment sum before depositing the net amount into the vendor’s account. Vendors can discuss this charge with their bank if it occurs.

Disrupting the Status Quo

With all these nuances to keep in mind, it can feel like involving a fintech will only add another cog to an already-overwhelming process. However, a fintech can determine the most efficient route through an intermediary bank, and assist in locating missing payments. If funds are returned for any reason, fintechs also act as a holding account while you decide if you want to exchange the funds back or resend them. Following a process like this ultimately saves time, money, and hassle.

If you’re on the fence about using a fintech for international payments, keep in mind that you aren’t losing out by mitigating an overly complicated bank processes. You’re merely side-stepping the complications in favor of usability.

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Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

How to Find Your Way in the World of International Payments

Credit card, direct deposit, check, cash, e-pay… making domestic payments is a breeze these days, with enough flexibility to offer optimization based on your vendor’s payment preferences. International payments, on the other hand, are much more complex, and bring to mind painful images of cumbersome wire submissions.

Alternate options, such as fintech solutions, enable companies to submit all their domestic and international payments in one file. If the fintech also includes vendor maintenance as part of their services, then the payment file draws banking details from the fintech’s vendor network, eliminating the responsibility of maintaining that data from AP teams’ plates.

But before we delve too deeply into the process, let’s take a step back and explore nomenclature. Over time, companies have imposed their own internal vocabulary over common terms. Terms like ‘wire’, ‘direct deposit’, and ‘ACH’ are often used interchangeably, even though they operate differently. Let’s synchronize our understanding of these words.

What’s in a name?

International vs. cross-border vs. FX

“Cross-border payments” is a self-explanatory term—the definition is right in the name. These funds cross international borders to reach their destination.

“International payments” also describes cross-border payment activity, but carries other specific interpretations as well. For example, it may also refer to funds transferred within a single country through a bank or fintech located outside of that country (e.g. Canada to Canada, but through a U.S. fintech).

The term “FX” (Foreign Exchange) is occasionally thrown around to describe international payments, though it typically refers to currency exchange instead of the transmission of funds.

At the end of the day, as long as your company recognizes the nuances, the use of any term is fine. For simplicity’s sake, the rest of this article will refer to “international payments.”

Stepping out of history and into the future

Wire vs. EFT

Wire is the most popular and recognizable form of international payment processing. From a simplistic, yet technical standpoint, wire payments transmit account data from one bank to another. It’s sometimes the only method for sending money from one country to another, especially when working with specific currency exchanges or infrequently paid countries.

The term “EFT” (Electronic Funds Transfer) is quite a bit broader. It is a catch-all phrase used to describe any electronic payment process. Wire, ACH, direct deposit, and other methods fall under this umbrella.

Standardized codes

Codes are commonly used to determine various international payment factors. Use of the wrong codes can cause downstream payment issues, so it’s worth identifying each type, since they often appear to be very similar to one another.

Country Codes

ISO (International Organization for Standardization) country codes are country-specific abbreviations with varied uses.  Although three ISO country code variations exist—ISO Alpha-2, ISO Alpha-3, and ISO Alpha numeric—the ISO Alpha-2 code is used most in the international payment scope, in IBANs and SWIFT codes. 

As the name suggests, ISO Alpha-2 codes are 2-character codes assigned to each country for identification purposes.  For example, the United States is “US”, the United Kingdom is “GB”, and China is “CN.”

Currency Codes

Currency codes are 3-digit codes that identify currencies. Their resemblance to ISO Alpha-3 country codes may cause confusion, so it’s always worthwhile to make sure you’ve got the right code before adding it to payment instructions.

For example, the ISO Alpha-3 country code for the United States is “USA” while the currency code for U.S. dollars is “USD”. Similarly, “CHE” is the ISO Alpha-3 country code for Switzerland, while the currency code for Swiss francs is “CHF.”

Payment specifications

Information requirements for international payments are far less cut-and-dried than those for domestic processes. The details often vary depending on the payment type, currencies, and the countries involved.

SWIFT/BIC Codes

Veteran AP personnel are likely very familiar with the SWIFT system (Society for Worldwide Interbank Financial Telecommunications), which is known as the BIC system (Bank Identifier Code) in some countries.

SWIFT codes were introduced in the ‘70s as a way to streamline the global money-transferring process and reduce the possibility of human error. SWIFT codes are a series of characters that identify the bank, country, and branch location to which a payment should be sent. Decades later, they still play a significant role.

Routing Numbers

While SWIFT codes are still essential to send international payments, the growing financial industry has highlighted the need for additional details.

Routing numbers are the collective answer, and play a fairly large role in the modern payment structure.

The caveat is that they may not always be called “routing numbers”, which is a U.S. term. For example, Australia has the “BSB Code”, China the “CNAPS”, and India the “ISFC Code”.

While it may seem redundant to provide both the SWIFT and routing details, it is an excellent way to clarify the payment destination.

IBANs and Account Numbers

IBANs (International Bank Account Number) arrived in the ‘90s as a way to further standardize banking information, and have been adopted primarily by countries in the European Union, the Middle East, and several countries in Africa. While IBANs vary in length depending on the country, they contain these common factors:

ISO alpha-2 country code

Check digits

Bank identifier

Branch identifier

Account number

Because IBANs often include the bank identifier (which shares digits with the SWIFT code), further account information isn’t typically necessary, which massively simplifies the payment process.

Countries that have not adopted the IBAN must still provide the SWIFT code, routing details, and the account number, as well as any country-specific requirements with their invoices.

Country-specific details

Additional details can include purpose of payment, tax documentation, and company phone numbers, amongst other things. Since each country requires specific information, it can be tricky to know exactly what to supply.

When in doubt, ask your payment solution provider—they can outline each country’s requirements, as needed.

Putting it all together

While international payment processes have evolved over time, the task is still nothing to sneeze at. Fortunately, fintechs like Nvoicepay have simplified the process, and store and maintain banking details on your behalf. That way, when you’re ready to pay your international vendors, you’re good to go in just a few clicks of your mouse—no more painful single-payment submissions through the bank.

Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

 

sanctions

Getting Caught on the Backswing – Will US Sanctions Undermine the Dollar?

Since the Bretton Woods Agreement in 1944 there has been one currency that eclipses all others for international trade: the U.S. dollar. The dollar dominates when it comes to reserves and the settlement of trades, a hegemony that affords U.S. foreign policy incredible strength on the world stage. However, the U.S. reliance on the strength of the dollar to pursue far-reaching sanctions is also beginning to cut at the roots of that strength, as allies and global trading partners simultaneously pursue their own economic agenda and react to perceived over-reach by U.S. policymaker. 

A View from the Top

In 2019, the dollar comprised over 60% of global debt, more than 60% of global reserves for foreign exchange, and was the medium used in 40% of international payments, according to the European Central Bank (ECB). Despite the economic output of the Eurozone roughly matching that of the U.S., the euro accounted for only 20% of foreign exchange reserves and just over 20% of international debt (1).

This allows U.S. foreign policy a potency lacking in other international currencies. The Trump administration has relied heavily on this dynamic, imposing coercive economic measures on a wide spectrum of targets from Venezuela to North Korea and exponentially increasing the number of sanctioned entities. In fact, the U.S. sanctioned around 1,500 Specially Designated Nationals and Blocked Persons (SDNs) in 2018 alone, almost 50 % greater than in any other single year. 

Growing trends have become noticeable in the financial streams flowing between borders; a rise in the use of the euro, RMB and ruble as forex currencies, development of routes around the conventional financial sector, and flurry of interest surrounding the nascent potential of cryptocurrencies. The major drivers of these changes are unrelated to sanction policy and are more tied to the politicization of U.S. monetary policy or the inherent economic interests of other nations and trading blocs, including turning their own currencies into global standards. Regardless of the drivers, these developments suggest an international system ill-at-ease with the power of the dollar.

Secondary Nature, Primary Threat

The unrivaled strength of the U.S. dollar affords U.S. policymakers a weapon unavailable to any other nation. This is built on by the ‘secondary’ nature of U.S. sanctions – extending the impact of sanctions to non-U.S. entities who do business with sanctioned entities or individuals – that leaves few avenues to evade the regime. 

As virtually all dollar-denominated transactions pass through the U.S. financial system, even if just momentarily when they are “cleared,” very few businesses are able to trade with the targets of primary sanctions without themselves falling under the secondary regime. Violators are potentially liable for sizeable fines or other punishments, including being locked out of the U.S. financial system themselves. 

While this is a useful tool for closing down avenues of terrorism, crime or other illicit activity, it also means countries that disagree with the targets of U.S. sanctions must either comply or place their own industry at risk. The EU-U.S. divergence on the Iranian Nuclear deal, or on U.S. sanctions towards Cuba, are good example of this. 

This increasing sanctions activity provides the seedlings that may undermine the dollar’s strength, as it prompts allies that disagree with sanctions regimes to develop alternatives to the dollar – such as the Euro, Chinese RMB or Russian ruble. Special Purpose Vehicles, such as the EU-Russian INSTEX, are created – albeit with difficulty – to provide routes around the conventional financial system. 

Alternatives

Against this politicization of the dollar, various countries are developing alternatives. The euro is staking its claim with the development of the INSTEX vehicle and a declaration by Jean Claude Juncker, then-president of the European Commission, “to do more to allow our single currency to play its full role on the international sector” (2).

Similar gauntlets are being thrown by the ruble – Russia has been developing its own payments system since the Crimean sanctions in 2014 – and the RMB, with the Chinese Cross-Border Interbank Payment System (CIPS) launched in 2015. Given the size of the Chinese market and its growing world position, the RMB could theoretically pose a challenge to the dollar. However, the politicization of the RMB’s value – witnessed most recently in its rapid devaluation targeted at injuring the U.S. as part of the trade war – undermines its use as a global currency in the near to medium term. 

Another potential pitfall for the dollar is the development of new financial technologies, including the much-discussed Blockchain and cryptocurrencies. Such systems allow for the circumvention of the U.S. financial system and enable payments in relation to sanctioned activities, and have already have been used to facilitate illicit payments in North Korea and Iran. 

Mobile payments are also on the rise, further reducing global exposure to the dollar. However, as with other examples above, the use of some of these alternatives are being driven in significant part by illicit activity, which may lay the seeds of its own demise or limited adoption. 

The dollar’s strength on the international stage is undeniable, affording U.S. foreign policy unparalleled reach and potency. However, increasing international attention is being given to the Trump Administration’s fondness for relying on coercive economic measures in foreign policy, including the imposition of sanctions, tariffs, export controls, and investment restrictions. 

Each time a trading partner or ally objects to the U.S. policy goals but is forced to accept a new sanctions regime because of the dollar’s dominance, that dominance is eroded. While the dollar remains by far the best safe-haven for investments, backed as it is by a resilient economy and a history of stability, the potential corrosive effect of sanctions cannot be ignored. The future use of sanctions should factor in this unintended consequence and overall sanctions policy designed to ensure the long-term dominance of the U.S. dollar. 

 

Matthew Oresman leads Pillsbury Winthrop Shaw Pittman’s International Public Policy practice, carrying out high-profile activities in many of the world’s capital cities. He principally advises governments, political leaders, businesses and NGOs on achieving their most important objectives. He regularly designs and implements legal and policy solutions, including managing integrated U.S. and Europe-based initiatives. He advises global businesses on entry into emerging markets and compliance with U.S. and international regulations.

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(1)https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190215~15c89d887b.en.html

(2) See Juncker, J.C. (2018), “The Hour of European Sovereignty”, State of the Union Address 2018 – https://ec.europa.eu/commission/sites/beta-political/files/soteu2018-speech_en_0.pdf

Top 5 Leading Global Banks

A cursory search of “top global banks” will yield a list, typically according to size and assets, of a familiar set of names. While many of these same names are mentioned in this piece, understanding why a bank is considered a top global bank is much more nuanced than how big they are or how much they’ve netted.

Leading global banks are recognized as leading by their peers because they perform exceptionally well in one of more categories. No bank has a monopoly over leading performance in investments, digital services, sustainable finance or diversity and inclusion. It’s hard to the be the top dog in everything. Therefore, we’ve selected the leaders in each of the previously mentioned, timely categories, as these are the categories that are most relevant in 2019 and these are the banks that are setting trends and leading by example.

Investments

To begin, investments is a tough category to rank, but experts widely agree that Citi is the best investment bank in the world. While Goldman Sachs and Morgan Stanley are highly regarded, when it comes to exceptional performance across regions (North America, Latin America, Western Europe, Central and Eastern Europe, the Middle East, Africa and Asia), Citi rises to the top.

From an institutional client (ICG) perspective, the breadth and scale of Citi’s wholesale banking operations is best-in-class. The ICG unit is divided into a banking division on one end and a markets and a securities group on the other. Revenues in the $35 billion range were registered in 2017, which is 7 percent higher than the previous year. Morgan Stanley reported $37.5 billion and Goldman Sachs, a handful below, but Citi really shines when it comes to personalizing its business per region rather than providing a one-size-fits-all solution to clients across regions.

Digital Services

Bank of America and HSBC are high-flyers in this category, no doubt. But they are not flying as high at the moment as DBS. Mobile banking at the Singapore bank  is leading the pack, and the bank made a concerted effort to get to this point. They started at the premise (with corroborating data) that a digital customer brings in twice the income. Stunning in a way, and couple that with (digital customer) higher loan and deposit balances, it is no wonder DBS chose to de-invest in brick and mortar strategies and throw their cards into the digital ring.

Since 2017, Bank of America has also been moving in line with DBS and notably integrated its now widely used peer-to-peer payment feature, Zelle, which allows users to send and receive payments at astronomically low prices. They also launched 8,500+ contactless ATMs, where card holders can engage in transactions using mobile wallet options (Android Pay, Samsung Pay, Apple Pay, etc.). HSBC has not been far behind, capitalizing on their highly popular virtual assistant, “Ask Amy.” A chatbot, Amy is able to provide timely information 24/7, on nearly any inquiry. An embedded customer feedback mechanism allows for the bot to keep learning and enriching her knowledge, which grows by the day.

With this said, DBS is still ahead of its competitors, with a market cap that was up 44 percent for 2017, and the bank is now considered more “tech” than a traditional banking sector investment. That’s a real sign of success!

Sustainable Finance

A new category (over the past decade), sustainable finance, as defined by Frankfurt Main Finance, “integrates environmental, social or governance criteria into financial services.” Under a responsible sustainable finance model, capital expenditure and investment decisions take the previously mentioned criteria in mind before acting. Last year, the lauded finance publication, Euromoney, awarded BNP Paribas with the “World’s Best Bank for Sustainable Finance” award, besting more than 1,500 contenders and being decided upon after nearly 100 interviews with leading bank CEOs worldwide.

A handful of years ago, BNP Paribas CEO, Jean-Laurent Bonnafe aligned the bank’s strategies with the United Nation’s 17 Sustainable Development Goals. Roughly 135 billion euros have been devoted to energy transition and reaching said goals, and BNP Paribas is now part of the “Breakthrough Energy Coalition” that lends its support to the active promotion and advancement of clean-energy solutions.

Another notable global bank player in this sphere is Nordea, a Nordic financial services group based out of Helsinki, Finland. With total equity of approximately 32.4 billion euros, the bank has capitalized on its multi-cultural history (formed via mergers and acquisitions of Finish, Danish, Norwegian and Swedish banks) to now compete head-to-head on sustainability issues with the likes of BNP Paribas. Strong performance results generated from clean financing activities (green bonds, green loans, etc.) have propelled Nordea to now begin to offer green mortgages.   

Diversity and Inclusion

Brian Moynihan has been rightly lauded as an exceptional CEO, but his work with diversity (which began 10 years ago when he became chair of the Bank of America Global Diversity & Inclusion Council) is where many feel he really made his mark. The company’s diversity numbers are on an upward trajectory where roughly 40 percent of the global management team and 30 percent of board directors are women. At a workforce level, there are more women now than men working at the bank. 

A key issue with Bank of America executives was retaining women during motherhood, and the London office most notably includes a maternity room that new mothers can access while on the job. Small changes like this transform the bank from talking inclusion to “doing” inclusion.

In Mexico, Scotiabank has been recognized by its peers as adopting one of the most progressive LGBT laws in the world. The bank services and employs a disproportionate number of LGBT customers and employees and is re-writing employment law from a policy and internal procedure perspective.

It is exceptional to witness the growth in these areas, digital banking and diversity and inclusion especially. Watch for global banking leaders to continue to emerge from unlikely places and for the industry to become much more diversified. This will be a win-win for customers worldwide.      

5 Trends Changing Business Payments in 2019

Suddenly, business payments are hot. 

I’d say there’s a growing level of understanding of the space and a feeling that B2B payments are starting to come of age. That is good news for customers, considering decades have passed since there was innovation in this space.

Here are 5 trends for business payments in 2019:

B2B payments innovation has begun

Many of the people who wanted to meet me were venture capitalists and private equity partners. B2B payments is a very, very large market—36 trillion in payment volume—versus about three billion for consumer payments. Most business customers are still paying with paper checks. This has always been an interesting category because it’s so big, and so far behind in digitization. Now, as the consumer payments technology market is becoming saturated, B2B payments have captured the attention of the investment community. There are a lot of new investments happening, so look for offerings related to B2B payments in the next few years.

Payments as a backbone

Vendor payments are tied to a lot of other processes. Once you digitize payments, it opens up opportunities with procure to pay, dynamic discounting, supply chain financing, and lending to name a few. For example, we’ve already seen Uber experiment with making auto loans to its drivers and taking the loan payments directly out of their pay. Companies should look to digitize payments with an eye to efficiency and cost savings now, and as a springboard into other innovation opportunities down the road.

Full payments automation

The first wave of new entrants in B2B payments has already hit the market, and many of their value propositions sound the same—cloud, simple, automated. But, not all of them are really in the cloud, simple, or automating the whole process. B2B payments have long been plagued by partial automation, and that’s a big reason why so many businesses are still stuck on checks. Cards and ACH make the transfer of funds electronic, but they also introduce new manual processes for file preparation, reconciliation, and vendor enablement. New, truly automated solutions can handle every part of the process. The person in accounts payable should only have to select the bills they want to pay and click the “pay” button. Buyers need to look past the marketing language and check under the hood.

Banks embrace fintechs

Five years ago, the relationship between fintechs and banks was adversarial. There was a lot of talk about fintechs using technology to take over different aspects of banking and to do it faster, cheaper and better. Over the past 18 months or so, we’ve seen the conversation shift. There is a growing recognition that banks and fintechs have very different strengths and that they will be stronger together. Bank and fintech relationships are now starting to form. Examples include Bill.com’s relationship with JPMorgan Chase. The idea is to bring Bill.com’s solution to small businesses through the bank channel. Chase’s recent acquisition of WePay provides an application for three-party payments for platforms such as ConstantContact and GoFundMe. This is just the tip of the iceberg; we will see many more partnerships and acquisitions in 2019.

Blockchain is still a technology to watch

Blockchain, the distributed ledger technology that underpins Bitcoin, is still very much part of the conversation. This is the only technology that truly has the potential to change banking and finance as we know it, providing a new set of instantaneous, decentralized, global payment rails. Banks and fintechs such as Ripple and Earthport are collaborating and getting traction, demonstrating they have a value proposition. But, if banks find ways to control it, it may end up being a better experience, but it won’t be any less expensive than current options.

All of these developments are great news for customers because the market is picking up speed and companies will have a lot more choices than in the past. B2B payments are far more complex than consumer payments, and there’s next to no technological innovation applied to them until very recently. Companies have lived with the status quo for decades. That is all about to change.

As fintechs encroach on core bank activities like lending and payments, banks are going to step up their game by either improving their own services or teaming up with the innovators. 

Karla is Chief Executive Officer, Co-founder, and member of the Board of Directors at Nvoicepay. She has 20 years of experience in management, finance, and marketing roles in both large and early stage companies. Along with the founding team, she has grown Nvoicepay into a leading B2B payment network

IF DAYS COUNT, HOW ABOUT HOURS? 2019 BANKING INDUSTRY OUTLOOK

Last year got off to an energetic start. It’s been a year now and how memories can fade, but economic growth worldwide was intensifying in January, advancing at a steady clip, and then … clunk. China, Japan, the Eurozone economies and the United Kingdom all began to weaken. The U.S. kept it moving but despite its acceleration, world markets continued to contract and pundits are now predicting a slowdown from 3.2 percent growth in 2018 to 3.0 percent in 2019.

With that said, however, the global banking system finds itself in one of its best positions in more than a decade. While recovery from the financial crisis has not been consistent across regions, total assets (per The Banker’s Top 1,000 World Banks Ranking for 2018) ascended to $124 trillion and return on assets (ROE) posted an impressive 0.90 percent. Banks in the U.S. have returned to health much more quickly thanks to forceful policy interventions and prudent regulatory measures. Total U.S. bank assets coming into 2019 hover in the $17.5 trillion range and efficiency ratios are posting new highs.

Within the larger transportation, logistics and supply chain management arena, banks and their ancillary collaborators play a critical role in financing a complex system of moving parts and players. Innovation is critical and for 2019 the banking outlook will be defined in large part by further technological developments and closer collaboration between actors.

Blockchain

We’ve been hearing about blockchain for a while now, but 2019 is poised to be a breakthrough moment for blockchain in the banking sector, with a notable focus on supply-chain management. Close to every major company worldwide runs enterprise resource planning (ERP) and supply chain management software. Yet, there are still some antiquated, human elements mixed in which make it difficult for firms to take full advantage of the technology. Global supply chains are giant ecosystems, with hundreds if not thousands or tens of thousands of moving parts, all trying to work together from a financial perspective to either achieve financing, transfer funds or get paid. Efficiency is at an all-time high, which means delivery times have been shortened and are putting pressure on middlemen (banks) to process funding for all transactional entities.

Blockchain has the potential to accelerate payment processing time and reduce transaction costs. According to an Accenture survey, “nine in 10 executives said their bank is currently exploring the use of blockchain.” Instead of relying on a central intermediary that would need to be negotiated with, managed and shared around the world, blockchains synchronize transactions and data across a shared network where everything is transparent and open to those on the network.

This last point is critical, however, as blockchain and distributed ledgers are only as valuable as the shared network they sit upon. Expect more integrated collaboration across countries with not only banks but financial technology companies (FinTechs) to arrive at a backbone in 2019 with which to underpin the system.

FinTech Collaboration

Mentioned earlier, FinTechs have exploded due to the ever-increasing integration of trade across borders. In earlier times, certain FinTechs concentrated their collaboration with individual banks, but 2019 is opening the door to a wider, broader banking ecosystem where FinTechs are developing and bringing to the table innovative technology—such as robotics, artificial intelligence and machine learning—to the collective table.

FinTechs make sense for banks as banks desire one thing: the best ROE they can achieve. In 2016, EY reported the largest 200 global banks reported average ROE of 7.1 percent. To get to 12 percent, for example, those same banks would need to increase revenues by roughly 15 percent and reduce their costs by just under 14 percent. FinTechs help banks streamline, drive down costs and enhance customer service. This is going to be front and center in 2019 and for years to come.

At the moment, approximately 12 percent of European supply chain finance programs are managed via FinTech platforms. The statistic in North America is not much different and while this figure perhaps will not double by the end of the year, the cooperation between FinTechs and banks will become much more pronounced.

Artificial Intelligence

Lastly, AI. Hardly confined to the financial sector, AI is revolutionizing how nearly every sector of the economy works. From virtual assistants such as Amazon’s Alexa to chatbots, at an individual level Accenture reports that 37 percent of U.S. consumers by the end of last year will have owned a digital voice assistance device. This has been spilling over into banking in a multitude of ways.

Customer service automation, especially vital across countries, languages and within supply chains, is resolving client issues at a fraction of the price as opposed to a real person. Autonomous predicted that AI could result in $450 billion in financial sector savings by 2030. In a similar vein, machine learning is integrating and analyzing data from multiple databases to arrive at a more holistic, 360-degree view of the customer or firm, which results in highly personalized products and services uniquely tailored per group. Behavioral data, credit and savings products and goals of the organization or person (personal goals) are shared and analyzed accordingly.

While not commonly associated with AI, fraud prevention and overall security will also be big issues for the banking sector moving into 2019. In this regard, AI is proving to be of excellent assistance with its unique ability to run through hoards of data and identify patterns that would otherwise elude the human eye. McAfee notes that cybercrime costs the world economy approximately $600 billion. AI can detect fraud in real time, providing banking and FinTech entities, as well as their customers and ancillary suppliers, information on the spot that could be disastrous if not managed correctly. With AI alone, Mastercard reduced “false declines” for its customers by 80 percent.

This year will likely see more radical banking changes as compared to 2018. As the world economy continues to work through some bumps and bruises, expect the banking outlook to be rosier.