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Innovate or die – the importance of innovation in financial services

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Innovation Wazoku

Wazoku’s Simon Hill looks at why good business ideas have never been as important as they are now and how financial services organisations can be turned into hubs of innovation
UK Innovation foundation Nesta recently launched its 2012 Innovation Index, which spoke of a ‘lost decade’ in UK innovation. Investment in new products and ideas across industries was shown to have fallen by £24bn since the 2008 recession and is not yet showing signs of recovery. Innovation Wazoku
Financial services (FS) was one of the chief offenders in cutting investment in innovation according to the Nesta report. This contrasts sharply with a McKinsey Report in 2007 that revealed FS executives saw innovation as important to the performance of their companies and that they expected their spending on innovation to increase.
This clearly hasn’t happened, yet given the almost continual crises in the finance sector over the past four or five years satisfaction with banking is arguably at an all-time low and in great need of innovation. Are these factors linked and what can banks and other FS organisations – whether multi-national businesses or UK-focused SMEs – do to encourage innovation?

Why good ideas are so important
Amazing and inspiring ideas are all around us. From technology to business and from sport to culture, ideas and innovation are at the very heart of almost everything we do.  Apple is a classic example of how a company can thrive based on a simple yet ingenious idea, yet one wonders how many similar ideas within business all over the world lay dormant – unseen, uncovered and unloved?
Innovation is important to business for a number of reasons and is recognised as having a significant impact on productivity and overall business performance and success.  In banking, there is a requirement to balance funding for innovation with expected returns, either through customer fees from customers or other means. But there is still no real reason why banks and FS organisations cannot be more innovative in their approach. This adds immense value to customers who would benefit from new ways of banking, different approaches, new products and services, which in turn can have an impact on the bottom line that will always be important in the sector.
Contactless payment capability such as Near Field Communication (NFC) has been discussed for years in the sector and the convenience it will potentially provide to customers and businesses is huge. Yet until recently, who was really out there pushing the message that this is a new and innovative way of paying and highlighting the benefits to customers of a wider-scale? Doing so could actually be a key deciding factor in someone choosing a bank.

Different levels of innovation
Not every innovation needs to be a massive game changer though – good ideas come in all shapes and sizes. As an idea management firm we work with businesses across industries, including a number of FS organisations, and have found that innovation can be defined in three hierarchical levels.
1) Core innovation: In most businesses the most effort (circa 70%) in terms of time and resource will be given over to ideas and innovation within this category. These typically deliver more incremental improvements to products or services to optimise the delivery, return and experience for existing customers.
2) Adjacent innovation: The level of complexity and risk involved changes as you move out from the core. Adjacent innovation may not be possible for all FS companies, as it can be extremely complex and failure rates can be high, especially when looking to take existing products to new markets. The most common strategy is to seek incremental ‘value-add’ products or services to layer on to existing core propositions. Around 20% of a company’s overall innovation effort would typically be given over to this type of activity, which in FS would include a company looking to exploit new markets through mobile, such as Barclays PingIt for example.
3) Transformational innovation: Not all innovation must be new but at the transformational level, businesses are looking for new products or markets, step change and big ticket items. This is higher risk than other levels of innovation, so whilst an early stage business would give up to 20% of their innovation portfolio to this, a more established business would allocate 10%.

Unlocking innovation
It is hard for any business to be good at all three innovation types, but there are measures that FS firms can put in place to ensure they are best placed to unlocking the untapped innovation in their business.
Capturing the ideas: This sounds obvious but too many good ideas are lost in quickly forgotten coffee break conversations or remain unnoticed in someone’s inbox. Having somewhere that people can submit their ideas, secure in the knowledge that those ideas will be read, evaluated and feedback provided is a key component for any organisation serious about innovation. Staff need to know how and where to share their ideas and know that ideas will get listened to by the right people in the organisation to provide feedback and to take that idea further.
Ensure the culture is right: If there is no culture of innovation, any FS firm will struggle to get innovation programmes off the ground. One way of addressing this is by rewarding people in terms of the ideas they contribute. This can be done officially, such as including innovation in staff performance reviews, linking implemented ideas to pay reviews. Or it can be done in a more ad-hoc fashion, with a bottle of champagne, or vouchers to a shop of people’s choosing given to the best idea submitted in a month.  Either way, incentivising ideas will encourage people to come forward.
But developing more open cultures and more collegiate ways of working is also incredibly important. The best ideas do not necessarily come from the most senior people or from those that shout their ideas the loudest, so providing the platform for anyone to submit ideas will reap dividends.
Financial services is an industry that perhaps more than any other, could benefit from the companies that operate in it adopting a more innovative approach. Consumer-confidence is down and the introduction of new products and services is one way in which trust can be rebuiltand for that to happen FS organisations need to embrace innovation more fully than they have done to date.
Wazoku is an idea management firm that works with SMEs and individual departments within large enterprises
www.wazoku.com

Finance

Tax administrations around the world were already going digital. The pandemic has only accelerated the trend.

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Tax administrations around the world were already going digital. The pandemic has only accelerated the trend. 1

By Emine Constantin, Global Head of Accoutning and Tax at TMF Group.

Why do tax administrations choose to go digital?

Among the many reasons, the most important one is the pressure to perform. Most governments complain that the tax revenues they collect are significantly lower than what should be collected. To increase the collection rate, tax authorities need better insight and access to detailed information.

Another key reason for tax digitisation is the need to address cross-border challenges and the issue of value creation.

“Where is the right place to tax cross-border transactions – is it the country of residence or the country of consumption?” has been a topic of discussion for some time. Adding another level of complexity, many cross-border transactions take place online. For tax authorities, the challenge is the lack of information about the users and the amount of payments made for the activities facilitated by the online platforms. Without such data, identifying the place of consumption is very  challenging

Where is tax digitisation at?

Most tax administrations are currently implementing e-reporting (enabling the submission of tax information in an electronic format) and e-matching (correlating the data received from different sources: e.g. both customers and vendors submit information on sale and purchases and the two sources of information are checked and agreed to identify discrepancies). Through e-reporting, tax administrations are able to:

  • Obtain real-time or near-real-time data submissions. Instead of waiting until the end of the month for summary tax information, each invoice is electronically communicated to tax authorities when it’s issued. This moves compliance upstream. Tax assessments are supported in real-time or close to it, instead of assessing transactions that have happened in the past. TMF Group’s research has found that 24% of countries surveyed globally require companies to issue tax invoices using technology and send them to tax authorities electronically, without any form of manual intervention. The percentage gets higher in the Americas (where more than 50% of countries have such requirements) and in APAC (where 36% of countries have no adopted this method).
  • Share best practices and boost cooperation with other tax authorities. According to a recent OECD report, 15 of 16 tax authorities surveyed use data analytics to drive audit case selection. With national implementations of BEPS (Base Erosion and Profit Shifting) and global tracking and monitoring, digital is a new focal point for the OECD. Tax administrators learned the value of such collaboration from previous projects and are putting that experience to good use by sharing approaches and leading practices.
  • Increase the coverage of the tax audit. Tax authorities request more and more data and more and more details during tax audits. Such requirements are not limited to technology companies that may host a platform where their users trade with one another. In some cases, companies have been asked to provide data files. In others, they have even been asked to install tax authority software on their systems.

When it comes to digitisation, it’s important to understand local and regional trends because the level of maturity can be quite different.

In Europe, countries are increasingly adopting SAF-T (Standard Audit File for Tax) submission requirements — long described as the closest to a consistent approach for managing tax audits.

Portugal, France, the Netherlands and Luxembourg are just some of the countries where SAF-T submission is now mandatory.

Digitisation brings benefits but also challenges for companies. In Spain, VAT refunds are suspended until SII (Immediate Supply of Information) submission is fully compliant. In the Czech Republic, the introduction of VAT control statements has led to many formal and informal queries by tax authorities with a required response time of 5 working days. All these requests put pressure on taxpayers to provide accurate tax data to avoid further enquiries.

LATAM is the most mature region in terms of tax digitisation. Latin American countries have adopted a “layering” approach, splitting tax and accounting data into “slices,” each with its own submission schedule, scope and format. Brazil is one of the most advanced countries in this respect. Virtually all accounting and tax data is communicated electronically.

In APAC, China and India have also started their journey towards fully-fledged electronic reporting.

A positive shift

Digitisation makes the tax journey easier, not only for the tax authorities but also for the taxpayer. One obvious benefit is the reduced tax return filing burden. For example in Poland, the submission of the VAT return was replaced by the SAF-T submission.

Based on the amount of data collected, tax authorities in Spain and Australia have created virtual online assistants to help answer tax questions. In India, the authorities are looking at pre-populating the GST return, reducing the amount of time that taxpayers spend preparing it.

Implications for companies

When responding to the electronic requirements of tax authorities, companies have some key considerations.

Data requirements – what will companies need to report, and how? What we see in practice is that:

  • Data sits in multiple places and companies need to either aggregate it automatically or reconcile it before extracting it manually.
  • Data is inputted manually and – as such – is prone to errors, inaccuracies and incompatibilities.
  • Some of the data needs to be manually adjusted outside the normal transactional cycle (e.g. output VAT on goods provided free of charge)

If a company faces any of the situations described above, the challenge will be to aggregate and validate the data before reporting it.

Processes – do current processes allow companies to collect all data that is needed? Often, the data collection processes do not allow for consistency or for storage of all relevant data. Processes might need to be adjusted to make sure that the right level of data is in place.

Technology – are the company’s current systems appropriate for reporting purposes? Existing software might not allow for accounting records to be digitally linked.

Tax reporting process – is the tax reporting process fit for purpose? As described above, tax resources need to be moved to the front-end of the accounting process: data needs to be accurate when entered into the system.

Companies that wish to mitigate these problems should follow these steps:

  • Understand local requirements.
  • Identify the required data sources and strive for a global standard. Looking for local solutions will not help you deal with the digitised world.
  • Create a library of tests – it’s believed that 70% to 80% of national revenue authority requirements are similar.
  • Prepare to respond to tax queries – as tax authority scrutiny and testing moves into real or near-real time, so must the response.

Digitisation is very much a global trend, more and more countries are introducing it, and it’s seen as a safe solution to reduce the tax gap. In the short-term digitisation may bring complexity, because it will affect how a company’s accounting and tax functions are organised. But in the long term, once processes are automated, it will save companies time and effort – and allow them to stay ahead of the demands of tax authorities.

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The ever-changing representation of value

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The ever-changing representation of value 2

By Vadim Grigoryan, Partner, Lunu Solutions

Ask a selection of people about cryptocurrencies and you’ll likely receive a wide range of answers. Some will wax lyrical about the huge potential of the underlying infrastructure that supports them, while others will dismiss them as nothing more than a worthless speculative bubble.

Cryptocurrencies have often been described in this way, mainly because – according to their opponents – they aren’t backed by tangible value. This is an argument that could easily be dismissed as very short-sighted, particularly if we remind ourselves that our current currencies all rely on trust – not exactly the most tangible of assets.

As Kabir Sehgal, a bestselling author and former JP Morgan vice-president, said: “In order to deal in money, humans must be able to think symbolically”. Financial history teaches us that money, in its first intent, was almost never meant to have intrinsic value – but to be a representation of it. For example, the porcelain-like shell of the cowry circulated around the globe for 4,000 years – longer than any other currency in the history of money. And its value was perceived not on its intrinsic utility, but on its beauty. Indeed, intrinsic value has long stopped be a measure of the real value of money. Let us not forget that each individual banknote costs a fraction of what it’s worth to produce – a $100 bill costs around 12 cents.

Money first appeared from the original evolutionary need to eat and survive by exchanging energy with another. That is why money has become whatever represents that energy: first food commodities – such as barley, cacao beans or salt – and then the tools to cultivate them. The symbolic distancing of money from its real value has developed over the years into coins, paper currency and mobile payments. Since money is fundamentally a mental abstraction of symbolic representation of value, what money is and what it will be can be is limited only by human imagination. Could something as invisible and intangible as cryptocurrencies be the next step?

Building value through trust

Something that has value should check two boxes: scarcity and utility. Scarcity of cryptocurrencies is often guaranteed by their design, in terms of a finite or limited supply (e.g. Bitocoin has a set cap of 21 million coins). Their utility is already embedded in the divisible nature of cryptos (unlike gold, which is very difficult to use transactionally, you can buy a coffee, a ferrari or a house with bitcoins). As such, the potential of cryptos to be a more efficient currency than what we already have would further increase with the wider adoption of digital currencies in retail.

We know that the representation of value has changed over time and is a fast-moving one in our society. That’s one reason why the concept of ‘money’ is much more abstract and complicated than most people realise.

But one thing that has never changed throughout the long evolution of money is the importance of trust. The reason money works is because people trust in its value; this is a key rationale behind most currencies – including cryptos. In fact, one of the key selling points of cryptocurrency is that it is built specifically on trust.

Although they lack the legal and institutional backing of traditional financial services, cryptocurrencies provide trust through technology. Blockchain technology enables the use of a distributed and immutable ledger of records, providing total transparency and making every transaction tamperproof. Data is decentralised and encrypted so that it can’t be interfered with or changed retrospectively. The crypto sphere is also intrinsically democratic. There is no central authority and no individual entity can change the rules of the game, which protects against government interference and makes it almost impossible to lobby private interests.

So, with this in mind, why are cryptocurrencies still largely used as an asset rather than a means of payment? It’s mainly because the real-life economy is still lagging in terms of providing crypto-based payment solutions. Many stores still fear accepting cryptos as a means of payment – whether due to technical limitations or concerns around fees and exchange rates – creating a vicious circle reinforcing the speculative nature of cryptos as assets that are just bought and sold.

We believe it’s time to break this circle and move towards a new financial model that accepts cryptos as a means of payment. It’s time for cryptocurrencies to be appreciated for the value they provide.

Recognising crypto personas

Our research into the ever-growing crypto community has uncovered an ecosystem of global citizens that share a philosophy; one pegged to a thirst for freedom, equality, inclusion and global interaction. For example, they are actively involved in social causes and place a high value on social responsibility for individuals and companies.

We also identified several different persona groups within that ecosystem, all of which have varying degrees of influence in the community.

  • Hamsters: this group is enthusiastic about cryptos, but lacks either the wealth or knowledge to shape the market or effectively navigate it.
  • Geeks: comprised of tech-savvy specialists who expect others to be up to their level of technical expertise
  • Cool cucumbers: a group of wealthier individuals focused on the investment opportunities and less emotionally involved with cryptos as a way of life

But the most powerful and engaged of the various user groups we identified, is the one containing individuals who have the financial capital and technical knowledge to drive and shape the future of the market – the Apostles. They are the community gurus, the public figures and the influencers who aren’t afraid to voice their opinions. Indeed, their minds have the power to drive widespread adoption of cryptos.

Over the coming years, this cohort of individuals will continue to grow and impose its expectations on retailers and stores. They understand the concept of money as a representation of value and recognise the role that secure, decentralised and globally connected cryptocurrencies can play in the existing economy.

If money is a symbol of value, this community appreciates the need for other symbols that represent other values in the world of tomorrow – such as transparency, empowerment and the end of the abuses of power that we have seen in the past.

Ultimately, although cryptocurrencies have been inching their way into the mainstream steadily since their introduction in 2009, the main stumbling block has been how to use them in everyday life. The good news is that we are during a transition. Trust is continuing to build, and the ‘value’ barrier is slowly being overcome. There is light at the end of the tunnel – driving cryptocurrencies and other forms of digital money forwards as the next step in money’s ongoing evolution.

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Revolut Junior introduces Co-Parent – teach children about money together

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Revolut Junior introduces Co-Parent - teach children about money together 3
  • Premium and Metal customers can invite a team mate to jointly manage their child’s Revolut Junior account
  • Setting Tasks, Goals and topping up up Allowances can also be done by a Co-Parent
  • Lead and Co-Parents both have full visibility and oversight of the child’s account

Revolut has today announced that parents can now add a Co-Parent to supervise their child’s Revolut Junior account and make learning about money easy and fun together, because teamwork makes the dream work.

Those on paid plans (Premium and Metal) will benefit from the new Co-Parent feature at no extra cost. The lead parent can invite a Co-Parent to join Revolut on any plan, including a Standard plan. The Co-Parent can be another family member, carer or  guardian who is responsible for the financial wellbeing of the kids.

Parents and guardians can use Revolut Junior to teach their little ones important lessons about finances and responsibility so they become more informed with each passing day. Both the lead and Co-Parent can use Tasks to teach children the value of money, Goals to help them learn to save and top up Allowances when they deserve a reward or just their weekly pocket money. Both will have full oversight of the child’s Revolut Junior account.

To add a Co-Parent to Revolut Junior, the lead parent can head to the Junior tab to find the Co-Parent invite link at the bottom of the screen.

Revolut Junior’s five top tips for parents/guardians to make learning about money fun 

  1. The power of together: Utilise the power of your joint experience and arrange a time or schedule a regular monthly meeting to sit down as a family to answer any money questions your kids may have.
  2. Set your own Goals: Learning the usefulness of savings is a valuable life lesson that will benefit kids when they hit adulthood. So if your child has been begging for a new game or toy, then encourage them to create Goals to save up faster and more steadily. Parents can add to it or children can choose to fund it from their allowances or by completing tasks, giving them some financial independence, but with full parental oversight!
  3. Sharing is caring: Show your child your app and how you use it to manage money so they see how the ‘grown-ups’ do this. Perhaps take a look at Budgets, and explain your reason for using this.
  4. Cherish your belongings: Get your child to put their top 10 favourite possessions in front of them and ask them to tell you why they picked each one. Explain the importance of selecting items they really like instead of comparing them with what their friends have.
  5. Money matters: Inspire your child to take some time for themselves to go through their purchases and expenditures in-app and use this time to reflect on if they still use all these items or if the buys were a good use of money.

Felix Jamestin, Head of Premium Product at Revolut, said: “We have added the Co-Parent feature to Revolut Junior so parents, guardians and carers alike can come together to teach their kids valuable skills for life. We have made sure that those with unconventional or multigenerational families will also be able to use this, so not only parents but grandparents, carers or members of their wider family can also support their child through their financial education with Revolut Junior.”

Revolut Junior’s Co-Parent feature is currently available to all Revolut Premium and Metal users in the EEA and the UK. It’s designed for kids aged 7-17, providing an account for children to use, controlled by their parents or guardians. So far over 270,000 kids have signed up to Revolut Junior. Revolut Junior has just launched in Australia, and plans to launch the product in Singapore and Japan in the near future.

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