Connect with us

Banking

EU REGULATION WEAKENS BANK EFFORTS TO MANAGE PERFORMANCE AND RISK MANAGEMENT, SAYS NEW MERCER SURVEY

Published

on

Survey
  • Majority of EU-based banks plan to increase use of non-performance linked cash allowances or raise base salaries to manage within imposed bonus cap and offset lower bonus opportunities
  • 70% of EU-based banks are seeking approval for increasing bonus cap to 200%
  • 2013 sees rise in number of US banks applying malus in employee bonus payouts

The Capital Requirements Directive IV (CRD IV), European Union regulation which has placed a cap on variable pay in the EU’s banking sector, is weakening efforts by EU-based banks to manage performance and risk through pay, says a new survey by Mercer. The consultancy’s report shows that, in an effort to remain competitive in attracting and retaining talented staff, large numbers of banks are increasing base salaries or using cash allowances as part of the pay mix. These allowances, however, cannot be performance-linked under the EBA’s definition of fixed compensation.

These findings come from Mercer’s Global Financial Services Executive Compensation Snapshot Survey which analyses pay information amongst 78 financial services organisations, including 44 banks in 18 countries. The report surveyed emerging pay practices related to changes in pay mix, application of malus conditions and clawbacks, strategies for addressing CRD IV restrictions and the definition and number of material risk-takers to which regulations apply.

According to Mark Quinn, Head of Talent at Mercer UK and a specialist in Financial Services remuneration, “High-performing employees expect remuneration comparable to their peers, but CRD IV restricts EU-headquartered banks in what they can pay in performance-related compensation. They’re looking at other methods of making up the shortfall to prevent staff walking into the arms of other less regulated competitors, such as hedge funds. Cash allowances are a form of fixed compensation that do not generally require a corresponding increase in benefits costs as base salary increases do. However, both are forms of guaranteed cash with no variable link to performance which is far from satisfactory.”

Since 2008, banks have made much progress structuring pay so that it allowed for appropriate consideration of risk-adjusted outcomes and conduct/compliance behaviors over a multi-year timeframe. Mercer’s report shows that organisations continue to try to strengthen the link between performance management and compensation, introducing individual risk-related factors in performance management and strengthening bonus malus/clawback conditions.

There is also strong evidence that banks are applying malus conditions, i.e., actually reducing or not paying deferred unvested awards when lower performance, non-compliance or misconduct occur. In 2012, 62% of banks applied malus with it being more prevalent amongst European banks (82%) compared to North America (25%).  But in 2013, the proportion of North American banks that applied malus increased to 42%. Almost half of banks said that malus was applied to individuals due to non-compliance or misconduct while almost one-third said that it was applied because of poor performance.

“The progress the banks have made in improving their pay practices over the last several years since the crisis is now being reversed to some extent with the impact of the CRD IV rules”, says Vicki Elliott, Mercer’s Global Financial Services Talent Leader. “To remain competitive, banks are shifting a significant portion of compensation into fixed, guaranteed pay which reduces their ability to pay for performance and also to defer as much compensation subject to malus over a multi-year performance period.“

Mercer has observed that in some cases banks are opting not to pay any upfront annual cash bonus at all in light of the increases in fixed pay and are shifting all variable compensation into multi-year deferral or long-term incentive arrangements.

Strategies to address CRD IV
When asked about their strategies to address CRD IV rules on remuneration, 70% of EU-based banks said they will request approval from shareholders or the parent company to extend the variable pay cap to 200% of total fixed compensation.   In addition, 63% of EU-based banks are implementing or planning to implement base salary increases while only 13% of those based outside the EU will do so. Fifty-five percent of EU-based banks and 47% of non-EU based banks are planning to increase cash allowances to compensate for the bonus cap for impacted risk-taking staff. At least 20% of organisations in the EU and also of organisations outside the EU are enhancing their broader employee value proposition beyond pay elements.  The survey also found that some EU participants are increasing the use of long-term deferred compensation (11%) and lengthening vesting periods (11%). Only 5% will be using “Bail-in” convertible bonds as a long-term compensation vehicle.

Conversion of Variable to Fixed Pay
In shifting variable compensation to fixed compensation, 27% of EU-based banks said they plan to discount variable pay, something that no bank based outside the EU intends to do. However, 39% of banks in the EU said they plan to adjust ratios on an individual basis which may or may not include some discounting.  “If no discounts are applied in the shifting of variable pay at risk for performance to fixed guaranteed pay, then the ‘risk-adjusted value’ of total compensation to the individual has actually increased,” says Dirk Vink, Executive Compensation Consultant and Project Manager for this survey.

The remaining question is how will this shift from variable to fixed compensation impact the market dynamics for talent outside the EU between non-EU based banks and those based in the EU. Since banks based in the EU must apply the same cap rules to their “risk-takers” no matter where they are located in the world, fixed compensation could rise more broadly across other markets as well, leading to less pay for performance.

Banking

How open banking can drive innovation and growth in a post-COVID world

Published

on

How open banking can drive innovation and growth in a post-COVID world 1

By Billel Ridelle, CEO at Sweep

Times are pretty tough for businesses right now. For SMEs in particular, a global financial and health crisis of the sort we’re currently witnessing represents a truly existential risk. Yet there is hope of a brighter future. Digital transformation is already helping organisations in countless sectors, with everything from building supply chain resilience to rolling out potentially life-saving contact-tracing schemes. Yet it’s not just delivering transformative benefits in grand projects like this.

Thanks to open banking rules, a new wave of fintech innovation is sweeping the globe, offering business leaders a new launchpad for success. Even something as simple as corporate expenses can be transformed by the power of open data — to help firms cut costs, reduce fraud risk and become more productive.

Opening up data to innovation

It’s easy to get bogged down in the technical details of open banking, and the slew of new acronyms it has ushered in: Third Party Providers (TPPs), Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs), and Application Programming Interfaces (APIs). Yet at the heart of the open banking revolution is a simple concept: the idea that forcing banks to open up their customers’ financial data will create more competition, and fresh opportunities for market entrants to create innovative new services.

This was at the heart of the UK government’s world-leading strategy when it was introduced back in 2016. A revised EU payment services directive (PSD2) gave it legal teeth, mandating that all payment account providers in the region provide third-party access for customers that want it. The push is also about reducing banking fees and enhancing financial inclusion, of course, but it’s in competition and innovation that the benefits really shine for businesses.

Access to real-time financial data via open APIs has already resulted in a range of new services which are helping businesses ride out the current economic storm. Whether it’s capabilities that can help freelancers prove loss of income to receive targeted loans, or services designed to streamline business processes to reduce costs and fraud — examples of innovation are endless.

What’s more, it’s already global. Aside from the PSD2, open banking rules are taking shape in Australia, New Zealand, Japan, Singapore, Hong Kong, Mexico and elsewhere. According to frequently cited Gartner predictions, regulators in around half of the G20 countries will create an open banking API regime over the coming year.

In the UK alone this is set to create a £7.2 billion revenue opportunity by 2022, with 71% of SMBs and 64% of adults expected to adopt it by then, according to PwC.

Making expenses pay

Corporate expenses and travel management might not be an area one immediately associates with high levels of innovation. But here too, open banking is having a profound impact. By combining automation, in-app approvals, integration with corporate policy and secure open banking APIs, companies like Sweep are offering new ways to solve old problems.

Part of the legacy challenge relates to productivity. Managing corporate travel costs and expenses was cited last year as the biggest concern of the UK’s small and mid-sized firms. Separate research claimed that SMBs are estimated to lose over £8.7 billion annually due to the time it takes employees and managers to complete these menial tasks. By automatically integrating real-time corporate bank account information into an easy-to-use app, we can save up to 15 hours a month on data input and travel administration per employee. That’s all time they could be spending on growing the business.

Another key area of concern is fraud. According to some estimates, fraudulent expenses claims could be costing UK firms £1.9 billion each year. In the US, the figure could be approaching $3 billion annually. Whether it’s the result of submitting expense claims for personal purchases, claiming for additional mileage on work trips, or over-claiming for other items, it all adds up. What’s more, fraud tends to spike particularly during times of recession, when normally diligent employees look for ways to supplement their income.

In this use case too, there are benefits to be had from open banking-powered solutions. Traditional manual processes offer too many gaps that can be exploited by fraudsters. Submitting paper receipts to finance departments — which must then input the information into spreadsheets or accounting software — is slow, error-prone and lacks accountability. However, with modern digital systems, transactions are automatically fed through from bank account to expense management platform. Here they are seamlessly checked according to policy and automatically approved, rejected or flagged for further investigation.

The future’s open

Thanks to the power of open banking, innovative fintech use cases like this are transforming operational challenges into opportunities to cut costs and fraud risks, improve employee productivity and become more strategic. With real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.

So what of the future? The good news is that open banking is only just getting started. As more sophisticated machine learning algorithms are developed, it has the potential for even greater disruption by empowering SMEs with predictive analytics and forecasting tools, or more accurate fraud checks, for example. Those in Europe may benefit most as PSD2 allows businesses to use tools that work seamlessly and securely across markets, without requiring any duplication of work.

In fact, open banking is not just good for individual SMEs, it’s important for Europe as a whole if we are ever to nurture successful digital unicorns to compete with those coming out of the US and China.

Open banking been described in the past as a quiet revolution. With the right buy-in from business and the continued innovation of digital platforms, it may soon become a full-throated roar.

Continue Reading

Banking

Banks take note: Customers want to pay with points

Published

on

Banks take note: Customers want to pay with points 2

By Len Covello, Chief Technology Officer of Engage People

‘Pay with Points’ – that is, integrating the ability to pay with loyalty reward points directly into the online check-out process – is a trend that is growing exponentially with big-name brands like Amazon, PayPal and American Express leading the way.

The past few months have posed an unprecedented challenge in the loyalty space, especially with the pandemic’s impact on travel. The unforeseen impacts across the board have caused institutions with premier incentive credit cards to feel increased pressure to retain their loyalty members. As such, exploring innovative ways to create a personalized loyalty experience for customers is at the forefront now more than ever.

Offering the flexibility to pay with points is certainly one option that can help transform financial institutions’ (FIs) loyalty programs. With the evolution of consumer preferences – like relying on other forms of payment outside of credit and the move towards contactless payments – viewing points as currency naturally ties into the “new ways” in which American consumers bank, pay and shop.

Personalization is a win-win for banks and loyalty program members

As the world continues to evolve in light of the pandemic, consumer habits like mobile banking and shopping online for groceries are likely to carry over long-term. As a result, consumers will expect their loyalty programs to provide new incentives to fit their ever-changing needs. By offering loyalty program members the ability to pay with points for the items they want or need during the online check-out process, FIs are creating a more personalized shopping experience. This can help increase member retention, especially compared to dated loyalty programs that offer limited options for point redemption.

As we’ve learned with iPhones, tap to pay and other technologies that reduce friction, once consumers begin using a new and convenient digital service, there’s little desire to go back to the old way of doing things. By incorporating pay with points into loyalty programs sooner rather than later, FIs will be setting themselves apart in terms of meeting their member’s needs with modern payment offerings.

Outside of providing a personalized experience to loyalty program members, pay with points as a program perk also has specific benefits when it comes to a bank’s bottom line. Currently, there are billions of dollars in liabilities in the form of unused points sitting on banks balance sheets. This is in part due to loyalty program members inability to spend their points how they want. By allowing a more personal and flexible way to spend points, banks can reduce those liabilities while creating a more engaging experience for their members.

Meeting consumer demand is easier than you think

Incorporating the infrastructure to power new digital capabilities is more often than not a cause for concern: how expensive will it be? What does down time look like? How long will it take to get up and running?

Luckily for banks, the process is actually quite simple – and inexpensive. With a lightweight integration of a few APIs, banks can tap into a pool of retailers to make their merchandise available for purchase with points by loyalty program members in no time. And as the retail network expands, there’s no need for additional IT work to add new brands into the fold. Ultimately, API integrations upfront create a frictionless and scalable solution for FIs and a preferred shopping experience for members. And based on market feedback, the personalized experience that results from giving customers the option to spend points as easily as they would cash or card, far exceeds any initial inconveniences that may arise.

According to our recent Customer Loyalty Survey, 75% of customers are more likely to spend loyalty reward points to make a purchase over other payment methods. The findings also indicated that 72% of customers are actively engaged in loyalty programs because of the available redemption options.

Long-term loyalty is not just about acquisition or promotional material, but rather the experience of redemption and viewing loyalty points through a fresh lens. Customers today are well-versed in what’s available to them online. The more redemption options offered to the consumer, the more appealing the FI becomes.

Loyalty point redemption in action

In April of 2020, when the world was mostly in lockdown, we looked at how a select group of approximately 3,000 consumers spent their loyalty reward points, comparing April 2020 to April 2019. Key findings suggest that, if given the opportunity, consumers will spend their loyalty points to buy what they want or need based on their specific circumstances. For example:

  • Significant increases in the purchase of outdoor items like BBQs and smokers (+3401%), fire pits and heaters (+2644%) and pool and patio accessories (+1297%) suggested people were making the most of the spaces around them.
  • Consumers were focusing on their personal health and well-being with the increase in points spent on fitness accessories (+1664%), bike accessories (+1453%) and fitness trackers (+536%).
  • Finally, the increase in purchases of hand-held power tools (+3076%), smart control lighting (+1750%), stick vacuums (+1096%) and specialty small appliances (+531%) suggests consumers took advantage of the opportunity to check projects off their at-home to-do lists.

We’re keeping a close eye on how loyalty point purchases evolve as more retailers and FIs get on board with viewing points as a true form of currency, especially in a post-pandemic world. Which items will rise to the top in the coming months and years as the payments ecosystem evolves? Will flight purchases or experience-based purchases regain popularity?

What’s next in the loyalty payments space?

As consumers continue to look for alternative payment methods, offering the flexibility to pay with points is the perfect opportunity for FIs looking to reinvent their loyalty programs. Engage People has always viewed loyalty points as a fiat currency, creating innovative technology that allows for easy integration that satisfies loyalty program members’ needs.

In the future, there’s a real opportunity to incorporate loyalty reward points into everyday life – extending beyond the online shopping experience. Imagine a world where you can pay for coffee, your bills, monthly subscription services like Netflix or make charitable donations with loyalty points just as you would with a credit card or cash. The future involves a mindset shift by consumers, financial institutions and the entire payments ecosystem, and that shift is viewing loyalty points as a true form of currency. Like reaching for cash, a debit or credit card, loyalty points can easily become a payment option of choice for consumers. FIs that are at the forefront of this trend now have the most to gain long term.

Continue Reading

Banking

The Importance of Liquidity Solutions

Published

on

The Importance of Liquidity Solutions 3

By Justin Silsbury, Lead – Product Manager at Infosys Finacle

Economic uncertainty and business complexity have made a deep impact on corporate treasury management in recent years. With regulations getting tougher, funding becoming elusive, and profits shrinking fast, the way liquidity is managed is making a real difference to companies’ survival. As corporate treasurers around the world struggle with the challenges of liquidity management, they are turning to their banks for support; it is imperative that the industry respond with digital solutions that enable clients to manage money efficiently at low cost.

Why corporates need liquidity solutions

Corporate banking customers need a liquidity structure that maximises security, liquidity and yield.  Even today, treasurers in multinational corporations lack visibility into their companies’ overall cash position across countries and currencies. Delivering returns on excess cash, although important, is not a priority for them, but making sure the money is safe and available when needed, is. Therefore, a liquidity solution should be able to consolidate a company’s cash position across all its accounts around the world, provide a unified view in real-time, as well as offer timely suggestions on maximising utilisation and yield. It should automate all these functions as far as possible to reduce both manual overheads and the risk of moving money manually on a daily basis.

Broadly, liquidity solutions are of three types – cash concentration solutions that automatically move money around the world; interest optimization solutions that reward customers based on their aggregated balances without the need to move any money; and investment sweeps that move all the consolidated funds to a money market fund or other short-term investment to earn extra returns.

And why banks should provide them

There are several reasons why banks should invest in a sound liquidity solution. The most important one is that without it, a bank can never become a customer’s principal financial institution. A large corporation will have many banking providers, each one trying to increase share of wallet; in this situation, a high involvement product such as a liquidity solution is particularly effective for building stickiness and strengthening a bank’s position vis-à-vis others. An illustration may be useful here: say a food retail chain banks with Santander in the U.K., and other banks across Europe. If the retailer chooses to consolidate its cash daily into its U.K. account using Santander’s liquidity management solution, where the excess cash can then be swept into an investment vehicle overnight, over time, Santander can cross-sell other products to the client to increase revenue and stickiness.

Technology does it

Corporate banking has historically lagged retail banking in technology adoption. It is high time that banks remedied this by digitizing their corporate solutions. Specifically, they can leverage a variety of digital technologies to provide clients instant access to liquidity, global visibility into the overall cash position, and efficient working capital management. With robotic process automation and machine learning, they can simplify and automate processes to cut cost and lead-time.  Blockchain enables banks to offer fast, secure, cross-border transactions, while open APIs ease collaboration and co-innovation with Fintechs, customers and developers.

Banks need to deliver frictionless, personalized, “retail banking-like” experiences over customer-centric corporate banking channels. Instead of channel silos – one for liquidity, another for payments and so on – customers will see data from all their accounts in one place, from where they can manage liquidity, forecast cash flows, secure trade finance etc. On their part, banks can use 360-degree customer insight to issue not just timely alerts but also contextual recommendations. For instance, being able to alert a customer that a large payment is due the following week, but also suggesting the best options for arranging those funds.

Apart from improving the customer journey, a real move in corporate banking is towards cloud adoption. Many banks have started the cloud journey, but many still have some distance to cover before they are fully cloud-enabled; mainly, they are migrating monolithic, on-premise workloads to the cloud. Early adopters, such as JP Morgan Chase, HSBC and Citibank, are setting the pace by developing their own capabilities as well as procuring certain components from Fintech partners to plug into their overall solution.

One size doesn’t fit all

In the past, corporate banking solutions were largely meant for big companies, but today they are relevant to enterprises of all sizes. Internet and mobile have enabled even small local firms to scale far and wide, creating a need for solutions to manage their money across borders. Therefore, banks need to make sure their liquidity solution can accommodate the different needs of different clients. Only a flexible, componentised solution can do that.

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2020
2020 Global Banking & Finance Awards now open. Click Here

Latest Articles

How can financial services firms keep pace with escalating requirements? 4 How can financial services firms keep pace with escalating requirements? 5
Top Stories43 mins ago

How can financial services firms keep pace with escalating requirements?

By Tim FitzGerald, UK Banking & Financial Services Sales Manager, InterSystems Financial services firms are currently coming up against a...

What Investors are Looking for in the Next Fintech 6 What Investors are Looking for in the Next Fintech 7
Investing47 mins ago

What Investors are Looking for in the Next Fintech

By Shaun Puckrin, Chief Product Officer, Global Processing Services Are investors getting pickier when it comes to fintech? It’s hard...

How payments can help streamline operations and boost customer satisfaction in the vending industry 8 How payments can help streamline operations and boost customer satisfaction in the vending industry 9
Finance55 mins ago

How payments can help streamline operations and boost customer satisfaction in the vending industry

By Darren Anderson, Business Development Manager, Self Service, Ingenico Enterprise Retail The COVID-19 pandemic has had an astounding impact on...

How virtual training is changing the game in remote learning 10 How virtual training is changing the game in remote learning 11
Business1 hour ago

How virtual training is changing the game in remote learning

By Aris Apostolopoulos, Senior Content Writer at TalentLMS and a faithful follower of the eLearning mentality. Along with the latest...

Businesses need to prepare for Brexit transition now 12 Businesses need to prepare for Brexit transition now 13
Business2 hours ago

Businesses need to prepare for Brexit transition now

THE Brexit process has been marred by uncertainty and it still remains unclear what our future relationship with the EU,...

How to maximise your virtual communications for effective team meetings 14 How to maximise your virtual communications for effective team meetings 15
Business2 hours ago

How to maximise your virtual communications for effective team meetings

By Tony Hughes, CEO at Huthwaite International leading global provider of sales, negotiation and communication skills development, shares advice on...

Business and data - building better operations 16 Business and data - building better operations 17
Business2 hours ago

Business and data – building better operations

By Bryan Kirschner, Vice President Strategy, DataStax Building your business on data. What have we learned so far? Coming into...

REIT Trends: Innovative Data Strategies for Better Investments 18 REIT Trends: Innovative Data Strategies for Better Investments 19
Investing2 hours ago

REIT Trends: Innovative Data Strategies for Better Investments

By Josh Miramant, CEO and founder of Blue Orange Digital Data transformation is this decade’s differentiator for REITs (Real Estate Investment...

Financial transformation is the new digital transformation 21 Financial transformation is the new digital transformation 22
Technology2 hours ago

Financial transformation is the new digital transformation

By Luke Fossett, ANZ Head of Sales for global recurring payments platform, GoCardless The term ‘digital transformation’ has become somewhat...

RegTech 2020: Exploring financial crime and the emergence of RegTech in the USA 23 RegTech 2020: Exploring financial crime and the emergence of RegTech in the USA 24
Technology4 hours ago

RegTech 2020: Exploring financial crime and the emergence of RegTech in the USA

with host, Alex Ford, VP Product and Marketing, Encompass, and guests, Dr Henry Balani, Head of Delivery, Encompass; Pawneet Abramowski,...

Newsletters with Secrets & Analysis. Subscribe Now