By Mark Somers, Technical Director at 4most Europe (www.4-most.co.uk) and Alexander Denev, founder of GraphRisk
Scottish Independence (if it happens), will be a once in a lifetime event but the need to estimate the impact of unlikely events like this (i.e. Euro breakup, British EU exit, Ukraine crisis, war in the Middle East and so on) is a depressingly routine problem. It is the type of problem that until recently was the unrivalled domain of “expert” analysts whose prognostications depend as much on the political point they or their backers are trying to make, as it does on having any specific evidence. Following the financial crash of 2008 however, there has been much research and thinking on how to model systematically, the outcome of improbable events. Increasingly there is a consensus growing as to how these problems can be tackled. The key is to build a visual language that can describe a scenario, which anyone can assess as to its appropriateness, but that can also be turned into a numerical, estimate of likelihood and impact.
Typically evaluations of a scenario start with an economic narrative, these are not strictly quantitative statements but they encompass the key causal mechanisms that are at play. These narratives can then be turned into what mathematicians call a “probabilistic graphical model” or PGM – a set of nodes and arrows.
Each node represents a measurable quantity and each arrow represents the direction of cause and effect. These diagrams are easily interpreted but of more mathematical interest are their properties for transmitting probabilistic information. Specifically, if the state of a node is known, (say Scotland becomes independent and takes no share of the Debt in the example above), then the probabilities of any nodes with connections with it (Foreign Exchange, Interest Rates, and Credit Rating for UK) will be updated and this updated information can then be propagated across the rest of the network. In his influential book “Causality” published by Professor Judea Pearl in 2000, he highlighted amongst other things, that a system under sudden change is likely to cause a breakdown of only a handful of key causal relationship. The dependencies of all the other causal relationships however are likely to stay the same.
Now, to work out what will happen in the event of an unlikely event we just need to patch up the handful of broken links; we don’t need to try and rebuild the whole model from scratch. It also means all of our empirical experience of how the world works is not discarded – only the parts directly connected to the postulated shock need to be re-evaluated.
This approach is proving very powerful with a handful of large financial services companies exploiting these mathematical tools to evaluate the impact of Scottish Independence using exactly these approaches. The methodology keeps boards, executives and regulators in the loop as to what lies behind the model (no black boxes). A further benefit is that having built one scenario it is relatively straightforward to reuse the majority of the network to evaluate a wide range of other scenarios – this is the key to good risk management, anyone can prepare for the one bad event they are expecting. It is the marginal scenario that happens to materialise, that causes the problems. Evaluating more scenarios should mean fewer nasty surprises.
So back to the case in point – what are the lessons we can learn from this approach in the event that the Scots do vote Yes on Thursday?
The monetary arrangements, oil reserve and debt shares are the first things that have to be solved by Scotland/UK but these problems are not independent of each other. If Scotland is not given the pound, it has the incentive to accept a lower portion of debt, or even repudiate it. If it finishes with its own currency – the Scottish pound (SCP) – it has to be either pegged or floating. A pegged currency needs enough foreign reserves to be maintained but this will not be the case unless Scotland reserves exceed roughly two months of exports. A solution would be to raise the central bank rates to attract capital. If the SCP is floating, on the other hand, its value will depend on many parameters such as the amount of debt, oil reserves and the newly formed Scottish central bank rates.
For the remainder of the UK, if Scotland repudiates its debt, then it would likely result in a one or two notch credit down grade. This would weaken the currency and could cause BoE to raise rates to keep the inflationary targets.
All these ramifications are difficult to follow in a narrative (and we have just described very few of them) but they are easily represented in a graphical form, and a graph encodes not one, but many narratives, each weighted by its probability of occurrence. All the connections between events (causes and effects) are clearly visible and can be inspected even by non-specialist. Mathematical theory helps to achieve probabilistic and logical consistency. Needless to say that a 100-page narrative or a black-box econometric model will obscure all the subtleties and ramifications behind such a scenario.
Finally, markets are already pricing some of these events (e.g. the GBP/USD devaluation in the past weeks). Graphical models can also be calibrated on these market signals to come up with probability estimates for some of the events represented in the graph.
Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds
Tangerine Bank Ranks Highest in Overall Credit Card Customer Satisfaction for Second Consecutive Year
With 73% of credit card customers in Canada saying COVID-19 has negatively affected them financially and 24% who say they are unable to make monthly credit card payments, overall satisfaction with their primary credit card issuer remains relatively flat year over year at 764 (on a 1,000-point scale), according to the J.D. Power 2020 Canada Credit Card Satisfaction Study,SM released today.
“While credit card issuers in Canada are faring somewhat better than their U.S. counterparts in averting the negative effects of COVID-19 on customer satisfaction, they are not out of the woods,” says John Cabell, director of banking and payments intelligence at J.D. Power. “Credit card companies are falling behind in key areas related to the customer experience, especially in factors linked to financial sensitivity and customer support channels, which are crucial during the pandemic.”
According to the study, despite a one-point increase in overall satisfaction from 2019, credit card issuers have experienced a year-over-year decline in key performance indicators (KPIs) related to interactions with credit card customers, such as showing concern for customer needs; appreciating customer business; problem-free experiences; card activation; and reward redemption. As a result, satisfaction is down 12 points in assisted online experience and down 11 points for call centres.
More than half (55%) of cardholders acknowledge COVID-19 has changed their card usage habits, mainly by spending less. Understanding customers’ needs and addressing their changing priorities can help card issuers to mitigate future decline in satisfaction and elevate loyalty. The study shows that offering free or discounted services in response to COVID-19 are the actions driving a more positive impression of the issuer (39% and 35%, respectively), followed by gestures such as employee support (33%); waiving fees (32%); and community support (32%).
“The pandemic presents an opportunity for issuers to align their card services and benefits with customers’ evolving needs,” Cabell said. “Issuers can increase the perceived value of the card and strengthen loyalty. Offering discounted airline tickets or free airport lounge access is probably not as lucrative these days for cardholders as, for example, it would be to extend the duration of annual fees.”
Following are additional key findings of the 2020 study:
- Satisfaction declines with household income: With 29% of cardholders earning less during the pandemic, many are looking for relief from their credit card company and are more critical of card issuers. In fact, credit card satisfaction among customers whose household income has declined due to the pandemic is lower than among those whose income remained unchanged. The largest gaps in satisfaction are in rewards (-12 points); benefits and services (-11); communication (-8); and customer interaction (-8).
- Call centre woes: The pandemic has put a greater strain on call centres, which has negatively affected satisfaction. Caller wait times jumped to more than 12 minutes during the pandemic compared with less than 8 minutes prior to the pandemic. Also, caller satisfaction with the level of courtesy exhibited by call centre representatives declined significantly, which calls out the need for card issuers to restore best practices among their reps and identify better ways to manage customer support.
- Cardholders are digitally savvy: Nearly two-thirds (64%) of cardholders solely rely on digital channels to manage their primary credit card activities, and those cardholders are more likely to say it is easy to understand information about their account and do business with their issuer than do cardholders who do not rely solely on digital channels. In fact, one of the bright spots in the study is improvements in customer satisfaction with mobile and online interaction of 8 points and 7 points, respectively, from 2019.
Tangerine Bank ranks highest in overall customer satisfaction with a score of 825, which is 61 points higher than the industry average of 764. American Express (801) ranks second and Canadian Tire (793) ranks third.
The Canada Credit Card Satisfaction Study measures satisfaction of cardholders’ primary credit card issuer. The study measures performance in six factors critical to the customer experience (in alphabetical order): benefits and services; communication; credit card terms; customer interaction; key moments; and rewards. The study includes responses from 6,728 cardholders who used a major credit card in the past three months and was fielded in May-June 2020.
The impact of the Accounts Payable risk landscape
By David Thorley, Director of Customer Development, FISCAL Technologies
The current economic climate has never been so uncertain. Not since the 2008 financial crash has there been a period where organisations are mindful about how the markets will play out and the effect this will have on economies around the globe. As a result, organisations have become increasingly conscious about the way they spend money, but they have also become more aware about how they save money.
The Accounts Payable (AP) department aims to reduce the amount of money lost in an organisation, making sure all payments are completed on time and are done so correctly, but this is unfortunately not always the case. For example, half of large organisations have duplicated or misdirected a payment to suppliers. This roughly accounts for £3 million being directed to the wrong supplier and resulting in a long and lengthy process in getting this money reclaimed. On top of this, 33% of organisations experience internal fraud every year, with an average loss of half a million.
Therefore, it is clear that in almost every financial department things slip under the radar, but what are some of the risks in the AP department and how can they impact a company?
Lost opportunities reducing income
The capacity for AP resources to work on higher value activities is reduced due to error and query resolution, this can range from anything from chasing up suppliers to looking for a misplaced document. As a result, those within the department are limited to what they can do due to these mundane, repetitive tasks.
Ultimately, lengthy pre or post audit activity reduces the ability of the business to transact, limiting growth and reducing competitiveness, all of which can be avoided if the correct tools are in place.
In some geographies and industries, errors and adverse findings in statutory audits can lead to financial penalties. These penalties can be anywhere from a few thousand pound to tens of millions. Just last year a leading consultancy was fined almost £20m for poor auditing. Payment Policy infringements can reduce an organisation’s ability to bid for certain types of contracts; critical infrastructures for example, which can have a significant impact on the way an organisation operates.
Payment errors and fraud directly affects the bottom line, which can result in a major impact in the financial reporting. Often financial reporting is skewed resulting in liquidity and profits being reduced. In public sector organisations, these lost funds reduce the capital available for frontline services, which can not only impact the quality of service provided but could also affect the reputation.
Increased processing costs
Invoice exceptions prevent supplier invoices being processed automatically. AP staff spend an inordinate amount of time checking, correcting and managing invoice exceptions, which significantly increases processing costs and time. Given the current climate, this time and money could be put to better use, helping a company grow and expand.
Organisations making overpayments – paying duplicate or incorrect invoices – and fraud are a common problem. Together, these account for between 0.5% and 1.5% of the number of invoices processed, with the cost running into millions in many cases.
As a result, whenever an audit is conducted, the AP team spends time finding and providing information and documents. The more issues that are found, the more time audits take to identify and recover lost cash.
AP teams will frequently need to check supplier records during their normal transaction processing. Large, unmanaged MSF hold numerous duplicates and no-longer-required records that create more payment errors and hours spent investigating and resolving queries.
Whether a private or non-profit organisation, fraud, errors, compliance breaches or poor financial results all heighten the risk of reputational damage for the organisation generally and the finance director in particular. The reputational damage caused by a high profile incident of fraud can be significant, affecting the business’ credibility and even the share price.
The shockwave from fraud can be more damaging than the financial loss. After a fraud is discovered, considerable time will be taken up investigating every new potential risk of fraud. Whatever the outcome of the investigation, this is an unwelcome distraction for the managers concerned. But, more importantly, the effect on morale and belief in the leadership’s capabilities throughout the organisation – not just the finance team – will be harmed.
Managing these risks
AP assures the protection of cash within an organisation, identifying risks and resolving them. To do this effectively and efficiently it’s imperative AP departments have the correct tools in place to ensure they follow a simple process that allows them to save time and money, helping their organisation both in the short and long term
 (The Hackett Group, Key Issues Study 2020)
 Source: https://www.qsoftware.com/fraud-prevention-and-detection/erp-fraud-prevention-key-measures/
Regulating innovation: the biggest challenge in payments
By Fady Abdel-Nour, Global Head of M&A and Investments, PayU
Over the course of the last six months, the payments industry has been lauded as one of the most impressive in its agility responding to Covid-19. Consumers and merchants have flocked online and safety has been a significant driver of the move to digital as entire countries discourage the use of cash – but what of financial and data security?
As digital payments adoption accelerates, there’s no time to waste. The pressure is on for governments and regulators to not only ensure security keeps pace with new consumer demand, but to look ahead and clear the road for future innovation.
Acceleration in digital payments
At PayU, we operate in 20 markets across the globe. Since the start of the pandemic, every single one of these markets has seen a seismic shift in consumer habits. In Poland, for example, the number of new onboarded e-shops was three times higher between March and May than in previous months. And in Colombia, e-commerce activity was 282% higher than pre-lockdown levels. Some merchants across our markets saw year-on-year revenue growth of a staggering 500-1000% during April and May.
New merchants are seeing this potential, moving online to increase their customer base and keep economies ticking. But with great innovation comes corresponding regulations. How can regulators keep up?
Innovation vs. regulation: an incompatible duo?
New ideas and technologies are undeniably critical to ensure services keep up with consumer behaviour. However, for this to happen safely, there needs to be collaboration between our industry’s innovators and regulators. Progress requires us to challenge and expand existing boundaries, holding our shared goal in mind.
Important as this concept is, it is by no means revolutionary. The widely pedalled narrative that innovators and regulators are at loggerheads is, quite frankly, outdated. It is not true that innovation in financial services has to disrupt existing systems and infrastructure. We have already seen countless examples of regulators working with the fintech ecosystem to enable and support innovation.
Across the emerging markets that PayU operates in, innovation initiatives are in place to educate entrepreneurs on the regulatory environment in which they operate. In Brazil, the central bank has established a sandbox, the Laboratory of Financial and Technological Innovation, to help fintech startups work more closely with regulators and government and accelerate the development of their ideas. The aim is to create a more efficient financial system, increase financial inclusion and reduce the cost of credit through better regulation. As the country rolls out Open Banking, acknowledging fintech’s potential to drive better socio-economic inclusion is incredibly encouraging.
It would be remiss of me not to mention The Monetary Authority of Singapore (MAS) here. To date, it has excelled in driving positive change by ensuring new players and services can operate within regulatory constraints. If they are unable to do so, the MAS reviews its framework and, where appropriate, adjusts it to safely progress innovation rather than stifle it. In 2019, for example, it issued five new digital bank licenses. Later in the year, it launched the Sandbox Express to help create a faster option for testing innovative financial services in the market.
The open-minded and collaborative approach of these regulatory models marks the future of financial regulation to me. The world is changing quickly and the parameters that keep us secure have to adapt and morph more than ever before. The job is not simple, but it can boost innovation and build a safe and sustainable financial environment, where pioneers are empowered to set the pace for change.
Consumer demand is only one side of the (digital) coin
The other trend creating complexity for regulators is the move towards embedded finance and Big Tech’s involvement in this.
Broadly, embedded finance means that fintech services are expanding beyond the walls of banks and becoming part of other business models rather than a standalone entity. This is a challenge in itself, as regulators will need to be vigilant to ensure that payments, credit and other financial services remain secure and customers are protected.
Across Europe, the US, Latin America, Asia and Africa, governments have also been grappling with how to regulate Big Tech. Facebook, for example, has launched ‘Facebook Financial’ to pursue opportunities in digital payments and e-commerce. Similarly, regulators in Brazil and India have been trying to navigate WhatsApp’s attempts to establish its new payments feature in both markets. These features were suspended by Brazil’s central bank and have been in testing in India for over two years.
The good news is that regulators are paying attention. The pushback we’re seeing is not simply aversion to change, but industry experts exploring how these developments can keep consumer needs at the heart and enhance the current payment ecosystem. New business models and new players are important to keeping us all at the top of our game.
Regulating a changing financial ecosystem
We’re in a truly remarkable age, where the role of regulation is being tested again and again. I believe that regulators have a more vital role to play than ever. Covid-19 has been a powerful catalyst in the financial sector and there is some positive change to be harnessed from the disruption.
If navigated shrewdly, regulators will succeed in capitalising on new trends to retain their core purpose: to ensure the safety and security of the customer and support positive change. The whole industry will need to work together closely to build a regulatory framework that is fertile for innovation and allows us to realise the enormous potential of payments in this new decade. So, what are we waiting for?
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