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Frontiers in Finance Issue #61 Reshaping financial services On the cover Harinder Takhar, Paytm Labs, page 6 Featured interviews Voices on 2030, page 13 Ranjana Clark, MUFG, page 22 Harit Talwar, Goldman Sachs, page 35 October 2019 home.kpmg/frontiersinfinance
Foreword
Letter from
the editors
Big changes; big opportunities
If change is the only constant then transformation is the only option. And so it is for
Financial Services executives around the world. Massive changes — in business
models and operating strategies, in regulatory environments and customer
expectations, and in technologies and competitive advantages — are sweeping across
the marketplace. And Banks, asset managers and insurers are all looking to seize on the
opportunities.
This edition of Frontiers in Finance explores some of the great challenges now facing
Financial Services executives as they strive to balance their short-term objectives
against their longer-term transformation imperatives. As organizations move to
re-evaluate, re-imagine and re-define their business models and operating strategies,
this edition offers some insights to help executives create and execute sustainable
transformation in an ever-changing world.
The articles in this edition are concentrated around three main drivers of change: the
desire for efficiency; the shift to digital; and the evolving regulatory environment.
Yet the lessons being shared by the banking, asset management and insurance leaders
interviewed for our articles are broadly applicable, regardless of the change pressures
your organization is facing.
Some of our articles — such as our cover story with Paytm’s CEO or interviews with
MUFG’s Head of Global Transaction Banking or with the Head of Global Consumer
Business, Goldman Sachs — offer deep insights into the pace and scope of the
change that is now underway across the industry. Others, such as our articles on the
changing nature of M&A, the introduction of IFRS17 and drive for improved operational
excellence, take a focused view of the new strategies at play within key areas of the
financial services organization.
What this edition of Frontiers in Finance clearly shows is that the leaders are not waiting
for clarity on what exactly the future may hold; they are taking bold steps and making
radical changes to their businesses to find and create their own opportunities for
transformation and growth. This edition provides practical ideas how they are doing it.
On behalf of KPMG’s global network of financial services professionals, we would like
to thank all of the executives and business leaders who took the time to share their
thoughts, experiences and insights with us.
If you would like to learn more about the issues raised in this edition of Frontiers in Finance,
Adrian Lee
Head of Financial Services or to discuss your own unique transformation opportunities, we encourage you to contact
KPMG in Malaysia the KPMG team in Malaysia listed at the back of this publication.
Contents Chairman’s message
Cover story
Paytm: Solving problems to
create opportunity
4
6
10 22 40
Compliance-driven
Creating efficiencies Digital models take hold transformation
10 What ails European banks? 22 Agility with discipline: 40 Next-generation banking
Exploring the challenges facing the Transforming MUFG’s technology and tax implications
European banking sector, and ways Transaction Banking business As operating models change, tax
in which to transform. Ranjana Clark shares her views on teams in traditional banks must
digital disruption in banking and four broaden their horizons.
14 Capturing the benefits of pillars for success.
simplification 46 AI offers the smartest solution
Simplification as a vehicle to a faster, 26 Connect to compete: Delivering for transition to RFRs
leaner, more agile business. the next-gen target operating LIBOR transition presents the
model opportunity to transform a manual
18 Accelerating transformation: What will the next-gen target and error-prone process. Are you
Beyond signing the deal operating model look like? ready?
A new way to look at, and achieve
value from, M&A and deals. 30 Does banking’s future outweigh 50 Tax, transfer pricing and
its past? transformation: What Asset
New business models will halt the Managers may be forgetting
13
Voices on 2030 band-aid approach to legacy systems Tax-savvy asset managers
The Future of Financial as banks look to new architecture undertake five key activities
Services that is digital to the core. to ensure they aren’t missing
Video interviews with opportunities or creating new risks.
leading and start-up financial 35 Spotlight: Goldman Sachs
institutions on the future of the breaking new ground with Marcus 54 When opportunity comes calling:
industry — interconnected, A discussion with Harit Talwar, Using the deferral of IFRS 17 wisely
collaborative, frictionless. Head of Global Consumer Business, Five critical commercial and
Goldman Sachs, on starting a operational opportunities for
digital bank. insurers from the delay to IFRS 17.
36 Flexibility for growth:
Operational excellence in an
era of digital disruption
What will it take to achieve
operational excellence in today’s
insurance industry?
Chairman’s message
Finding the fortitude
to transform
F
inancial service executives know they need to get serious about
transformation if they want their organizations to survive. Now
they just need the organizational fortitude to make it happen.
James P. Liddy
Global Chairman, Financial Services
KPMG International
Partner, KPMG in the US
As an industry, we have spent years Start with a healthy appetite In part, this reinvigorated commitment
talking about the need for radical The reality is that, until today, few to transformation is being driven by
transformation. Yet, notwithstanding a executives have seemed willing to risk concerns around competition. Executives
handful of truly innovative leaders, the their careers on a wholesale organizational are starting to realize that the more
reality is that little has actually changed transformation. Yet my conversations innovative brands are starting to look and
in the way most financial services with banking, insurance and asset act quite unlike a traditional bank. They
firms operate. management leaders around the world also understand their customers no longer
suggest that the mood is starting to shift. want the same types of financial services
Sure, over the past decade, many key
Executives and organizations are starting they did just a few years ago. And that is
processes have been digitized and
to find the intestinal fortitude to do what leading many financial services executives
automated; some exciting new channels
they know they must. to reconsider where they want to position
and innovative tools have been added;
themselves in the go-forward economy.
new business models and operating Consider this: In KPMG International’s
models have also been adopted. recent global survey of financial services While most executives recognize that
CEOs,1 22 percent of respondents transformation is now an absolute
What we have not yet seen, however,
admitted they were primarily driven imperative, my discussions with them
is widespread appetite — or, more
by short-term growth pressures. But suggest that many are worried they
importantly, competition — around
47 percent said they were more motivated may not have the people, processes or
full-scale transformation programs.
by much longer-term objectives such as organizational agility to be able to do what
Instead, we have seen smaller-scale
upholding the values of customers, making is necessary to compete. They want to
efforts and initiatives, largely aimed at
an environmental and socioeconomic progress, but they are concerned they may
achieving cost cutting and efficiency
impact or innovating the business model. not have the right foundations for success.
objectives.
1
Global CEO Outlook 2019, KPMG International
4 | Frontiers in Finance
Chairman’s message
Add the right ingredients Customer focus: Perhaps not
My view of the banking, insurance and surprisingly, around two-thirds of
asset management industries suggests financial services CEOs agreed they
there are five key areas where financial will need to significantly improve their
services executives will need to focus understanding of customers going
on if they hope to have the organizational forward. The problem is that today’s
capabilities, capacity and fortitude customers lack filial loyalty to historical
required for sustainable change. institutions. They want what they want,
when they want it, and they don’t really
Talent: One of my greatest concerns care who they get it from. That makes it
is whether today’s financial services extraordinarily difficult to retain customer
workforce has the skills and capabilities loyalty and deliver on customer needs
required to be successful as the workforce on a consistent basis. The leading
of tomorrow. Financial services firms are brands are applying a wide range of
full of people with really good production technologies, partnerships and models
capabilities; what they often lack are to improve their understanding of their
innovative thinkers at the operational level. customers. And they are communicating
The leading firms are reorienting their with their customers in ways that
workforces to focus on recruiting and enhance convenience, build loyalty and
developing employees who are data- inspire trust.
driven, analytically inclined, attuned to the
technological change in the marketplace Efficiency: Building a new organization
and keenly aware of the shifting needs of on top of inefficient foundations is not
their customers. the key to successful transformation,
particularly in a time of increased market
Culture: Financial services firms will need volatility and uncertainty. While many
to start delivering the types of products banks are currently focused on cutting
and services their customers require. And out costs and improving bottom-line
CEOs recognize they will need to foster a financial performance, the leading
much more innovative and entrepreneurial brands are those that are using the
culture in order to achieve that. In fact, in opportunity to improve organizational
our survey of financial services CEOs,2 agility, encourage flexibility and enhance
84 percent said it was critical to ensure overall resilience. They view large-scale
their employees feel empowered to transformation as a way to reduce the
innovate without worrying about the day-to-day managerial burden of the
negative consequences; just 56 percent organization so that decision-makers and
believe their organization has a culture employees can focus on creating value.
where failing in pursuit of innovation is
tolerated. Cleary, more must be done to I’ll have what they’re having
create an innovative culture. As this edition of Frontiers in Finance
clearly illustrates, the path to
Contributor
Security: In today’s financial services
industry, providing a safe and secure transformation need not be fraught
environment is often seen as table-stakes with risk. Indeed, this publication is
by customers. But that does not make it filled with stories of banks, insurers
any less of a priority. It is no longer good and asset management organizations
enough to manage cyber events when that are taking transformation head-on
they occur. Cybersecurity needs to be a and finding ways to turn their risks into
opportunities for competitive advantage. James P. Liddy
core competency within the organization — KPMG in the US
one that customers can trust. Our survey What differentiates the leaders in E: jliddy@kpmg.com
of financial services CEOs indicates that this publication from the rest of the Jim is the Global Chairman, Financial
almost seven in 10 organizations see Services, KPMG International. He
industry? In my opinion, it’s that they
information security as a strategic function also leads KPMG in the US’ Financial
had the intestinal fortitude to take the Services practice. Prior to assuming his
and a potential source of competitive first step on the road to fundamental current roles, Jim served as Americas
advantage. transformation. Leader, Global Financial Services.
2
Global CEO Outlook 2019, KPMG International
Frontiers in Finance | 5
Cover story
Paytm: Solving
problems to create
opportunity
P
aytm has revolutionized India’s payment environment,
and at the same time is creating massive opportunities
for banks, insurers and asset managers.
Harinder Takhar, Paytm Labs Inc.
6 | Frontiers in Finance
Cover story
If you own a smartphone and spend any available to them. Less than 2 percent of
time at all in India, there’s a good chance the population had a credit account. Cash
you have the Paytm app on your home and cheques were the norm.
screen. Most people living in India do:
They use it for everything from buying
Harinder and Vijay Shekhar Sharma
(Paytm’s founder) realized this was a
Users of Paytm’s
groceries and paying school tuition fees
through to selecting insurance products
problem they could help solve. In 2014, app have access
and getting loans.
the company introduced the Paytm
Wallet. “Allowing customers to store to a stunning
Adoption rates have been amazing —
even by today’s standards. The company
money in their virtual wallet meant that
Indian consumers could now make
array of goods
was founded less than a decade ago.
Yet, today, more than 7 million merchants
transactions using digital money,” noted
Harinder. “It was a game changer.”
and services.
across India use its QR code-based At last count,
mobile payment system. The app has
been downloaded more than 100 million
A super-app in the making
Over the next few years, Paytm
the platform
times; the number of registered users
has jumped from just 11 million in 2014 to
added dozens of new use cases for its
technology. Paytm’s mobile payment
boasted more
more than 420 million today. Revenues
soared to US$480 million in 2018.
platform was, for a time, the only than 15 million
payment method accepted by Uber in
India. It partnered with a wide range merchants
Finding the source of the pain
Paytm’s core business has always
of transport, utility and entertainment
companies to create digital payment
across more than
revolved around payments. But the
company sees itself more as a ‘problem
systems. And it launched an
e-marketplace where customers can
200 different
solver’ than a bank or a tech firm. find almost any item or service available categories of
“Our approach is to identify the pain
points for customers and then solve
in India, often at a discounted rate.
“Our typical customer comes to us
service.
them really, really well — better than because of a needs-based reason —
anybody else can,” said Harinder they need to take a bus or pay a bill — but
Takhar, former CEO of Paytm in India over time, they start to discover that we
and current CEO of Paytm Labs Inc. in can actually help them solve a much
Toronto, Canada. wider range of needs, from paying their
kids’ tuition fees through to finding a
The first pain point the company solved
great deal on an item they really need,”
for India’s consumers was around
added Harinder.
pre-paid mobile top-ups: Paytm allowed
customers to top their accounts up Users of Paytm’s app have access to a
instantly on their phones rather than stunning array of goods and services.
going to a store, buying a top-up card and At last count, the platform boasted more
struggling with an extraordinarily long than 15 million merchants across more
password. That allowed it to build brand than 200 different categories of service.
awareness and a loyal customer base.
Many of those categories involve
Fixing the system what is traditionally seen as financial
services. For example, Paytm offers
The company’s next objective was customers the ability to insure a wide
much more ambitious — to make India’s range of purchases — including bus
payment system more inclusive, more trips and movie reservations. It has a
efficient and more reliable. It was an ‘fractionalized asset ownership’ product
audacious goal. that allows customers to pay as little
When the company was founded, the as 1 rupee for a fraction of a stock or
vast majority of India’s population had asset. Its Paytm Gold Savings provides
no access to formal banking services at customers with a long-term savings
all. Those that did have bank accounts vehicle.
often struggled to use the instruments
Frontiers in Finance | 7
Cover story
Creating markets
While it may seem as if Paytm is taking
on the traditional banking system, it is
not. In fact, as Harinder is quick to note,
Paytm is providing a pivotal intersect
... Paytm’s goal is not just to sell
between India’s population and the
established banking order.
products to users. It’s also to
“We see Paytm as a way to bring half
help users achieve their own
a billion unbanked Indian consumers
into the formal banking system,” noted
goals. That often means helping
Harinder. “People who work in the them establish themselves in the
informal economy or in rural areas have
pretty much the same financial services mainstream economy.
needs as everyone else. But they are
often left out of the system because they
are not on anyone’s radar.”
Indeed, given its rapid rate of growth
and adoption in India, the app is quickly
becoming the top distribution channel for
financial services in the country. Through
the merchant store, users can access
a wide range of traditional financial
products, from home and life insurance
policies through to investment assets
and products.
“We help our users discover the
products and services they need,”
added Harinder. “The traditional banks
and insurers love the fact that we have
access to people they simply could not
reach before.”
Driving customer acquisition
Yet Paytm’s goal is not just to sell
products to users. It’s also to help
users achieve their own goals. That
often means helping them establish
themselves in the mainstream economy.
In a cash economy, small businesses
and merchants are often overlooked
by the traditional banks due to a lack of
reliable records and credit history. Paytm
helps to solve that pain point by using its
technology to create a robust and reliable
view of its business users — their
cash flows, their customers, their daily
balance sheet status and so on. And they
use that view to help the business
establish their credit-worthiness.
8 | Frontiers in Finance
Cover story
“More often than not, we’ll then help founder was featured in Time’s 100 Most
that merchant find a bank that wants Influential People (2017)2 and Harvard
to work with them based on the data Business Review did a case study about
we have collected,” added Harinder. Paytm titled, Paytm: Building a Payments
“We are helping banks acquire new, Network (2017).3
credit-worthy business and personal
China-based Alibaba Group and Japan-
customers that simply didn’t exist in
based SoftBank have both made
the mainstream economy before the
significant investments into Paytm over
digitization of payments.”
the past 10 years. So, too, have Western
Out of India investors such as Sapphire Ventures
and Berkshire Hathaway. As of the start
So what is Harinder — Paytm’s first of last year, the company was valued at Contributors
CEO and long-time friend of founder more than US$10 billion.
Vijay Shekhar Sharma — doing at Paytm
Labs in Canada? Solving more pain “Investors like that we solve problems.
points, of course. And, since we do it better than anyone
else, our customers keep coming back,”
The company has been looking for noted Harinder. “We still have significant
opportunities to use its technology room to grow in our home markets and a
to address payment opportunities world of amazing opportunities overseas.” Harinder Takhar
outside of India. Last year, the company CEO — Paytm Labs Inc.
partnered with Japan’s Softbank and Harinder is the CEO of Paytm Labs
Ready to partner Inc., the Toronto-based research and
Yahoo! Japan to launch a new digital
From his vantage point, Harinder is development division of Paytm. In
payment system in Japan.
confident that the current state of his previous role, Harinder led Paytm
“When we launched PayPay in Japan, about disruption in financial services will as its first CEO in India when Paytm
87 percent of personal retail transactions continue for the foreseeable future. launched in 2011. At Paytm Labs
Inc., he is responsible for two key
were happening with cash,” said Harinder.
“Consumers clearly expect the way they objectives: building Paytm’s machine
“Japan is such a large economy with learning and big data technologies
discover and use financial services to
significant consumer spending. The and growing Paytm’s presence in
fundamentally change,” he noted. “We
opportunity to apply our technology to help North America.
can’t expect things to continue to happen
solve that problem was obvious.”
in the same old ways. As an industry, we
Paytm also sees significant opportunity need to keep up with expectations.”
in Canada where the organization has
Harinder sees Paytm as the technology
already developed a consumer app and is
geek that understands what customers
now investing into its merchant-acquiring
really want and need. And they are able
capabilities to create more value for
to move faster than most traditional Amarjeet Singh
customers. The Lab in Canada is also
financial services organizations to deliver KPMG in India
where Paytm develops and tests many
on those expectations. The opportunities E: amarjeetsingh@kpmg.com
of its investments into new technologies. Amarjeet is a Senior International Tax
for partnerships are immense.
and Regulatory Partner with KPMG
Capital and commendations flow “We look forward to working with India specializing in the area of internet
Paytm’s ability to solve problems with all sorts of banks, lenders, insurance commerce and start-ups in the Fintech
technology has made it a darling of companies and asset management firms space. He is a qualified Chartered
to bring these new technologies and Accountant and has advised a number
technology investors and pundits. The of Corporates in relation to inbound
company has won the FT Future of customer interfaces to market,” added and outbound investments from India.
Fintech Award and Forbes’ Outstanding Harinder. Expect to find the Paytm logo He is also the Lead account partner for
Startup of the Year Award.1 Paytm’s on your smartphone soon. Paytm in India.
1
https://paytm.com/about-us/
2
https://blog.paytm.com/vijay-shekhar-sharma-named-to-the-2017-time-100-list-of-most-influential-people-in-the-
world-1d4f5cffe696
3
https://www.hbs.edu/faculty/Pages/item.aspx?num=52175
Frontiers in Finance | 9
Creating efficiencies
What ails
European banks?
Francisco Uria, KPMG in Spain
M
aking generalizations about European banks — as about
North American or Asian banks, for that matter — is
always rather unfair. Each region, each entity, each
business model faces wildly diverse circumstances, such as the
degree of progress made along the path of digital transformation,
the regional setting or the range of products and services on offer.
10 | Frontiers in FinanceCreating efficiencies
Nevertheless, there are aspects common analysts and institutional investors about traditionally buoyed up the profits of
to most banks that indicate that European any improvement in the short term, given financial institutions. Nor will achieving
banks are having a very difficult time of it. that the lack of economic growth can slow revenue growth be easy. In all likelihood,
down the rate of growth of credit demand. only by slashing costs, reducing the
Objectively, most European banks
number of branches and making staff
are experiencing problems of lack of Sure enough, the global economic context
cuts will institutions be able to make a
profitability, the origin of which is the and, particularly, trade tensions between
positive contribution to profit and loss.
subject of discussion. the US and China, on the one hand, and
This scenario has dealt a considerable
between the US and Europe, on the
On the one hand, banks and the blow to aggregate stock market
other, are affecting European economic
associations that represent them claim that capitalizations as was seen when the
growth and slowing it down, as both
the source of the problem is essentially closing bell rang at the end of 2018.
the European Commission and the ECB
the European Central Bank’s (ECB)
have previously stated. Obviously, other Regulation has not helped. In recent
policy of lax money and negative interest
political factors such as Brexit and the months, the individual levels of MREL
rates that, as we recently learned, are
uncertainty it has created have also played (minimum requirement for own funds
set to continue for some time due to the
a part in the lacklustre performance of and eligible liabilities), which represent a
weakness of the eurozone economy. ECB
the economy compared to that reported sizeable burden for small and medium-
spokespersons at the highest level have
some months ago. sized entities that are less accustomed to
repeatedly contested this claim, arguing
raising finance on capital markets, have
that the real source lies in an excess of Against this backdrop, the general
gradually come to light.
installed capacity and the attendant need outlook for the European financial sector
for countries that have not yet undertaken is one in which the beneficial effects of On 2 July 2019, the European Banking
restructuring and streamling processes, to digital transformation on efficiency are Authority quantified the aggregate impact
do so — and soon. still nowhere to be seen. New players of the new Basel III capital adequacy
(singularly, the Big Techs) are moving requirements, which mainly affect the
Combined with this perceived lack of
in, affecting areas of business that have larger banks, at Euros 135.1 billion.
profitability comes the pessimism of
Faced with new competitors, heightened regulations and greater capital adequacy requirements, European
banks would do well to respond with a combination of the following strategies:
1 Diversification of revenues, reinforcing positions in asset management, insurance and private banking.
2 Efficiency improvements through the implementation of effective strategies aimed at cost cutting and
streamlining of operations.
3 Monetization of technological investments such that the ‘digital dividend’ derived from the
transformation that has already taken place can materialize.
4 Use of market opportunities to shed non-performing asset portfolios (NPLs), in order to comply with
the repeated requests of the regulator and the supervisory bodies, and entry into agreements with
industrial partners with a view to developing specific business segments (consumer credit, loans to
SMEs, asset management, depositary services and custody, payments, etc.) in anticipation of the arrival
of new competitors.
Frontiers in Finance | 11Creating efficiencies
In the new environment, with old and new On the other hand, regulatory
competitors threatening the profitable fragmentation clearly persists in such
areas of the bank, and with legacy systems delicate areas as consumer protection,
that require much more than a simple deposit insurance, the insolvency
patchwork update, the investments regime, etc. This fragmentation means
traditional banks need to do are massive. that banks do not have complete
But it would be a mistake to think that the freedom of movement, even within the
change is only related to technology. eurozone.
On the contrary, it is not just, or mainly, It is discouraging to think that it has not
about taking advantage of what been possible to make progress in the
technology can offer. It is a question of creation of a European deposit insurance
undertaking an integral transformation of scheme (EDIS), despite the time that has
the business model of the entities and to elapsed since the political agreement
rethink their strategy. The key question to was reached to build a banking union in
respond is how the banks will create and the eurozone.
monetize value for their clients and the
Furthermore, this fragmentation, in the
society as a whole in the future.
case of a cross-border merger, prevents
This is also a critical point for many European synergies from being captured as they
banks: how to position themselves in the are in a purely domestic context, so any
marketplace. They should carefully select potential efficiency gains are greatly
their target markets, business and clients attenuated by the limited expectation of
and also decide if they can make this work an increase in turnover. Risks of every
alone or if they need some partnership and type are inherent to the integration
with whom. process in which cultural, linguistic and
other factors also come into play. One
Aside from these strategic decisions, there
might well ask, why such insistence in
is also the issue of consolidation. Naturally,
this regard by the ECB?
in the above context, an increase in size
can be a means (though not the only one) For all of the above reasons, and
to achieving efficiency gains and boosting notwithstanding the view that integration
profitability. One should be aware that such processes between credit institutions
gains usually occur after a certain period, from different countries can be
and that initially, at a time when the sector beneficial, the most prevalent view is
is experiencing difficulties, the profit and that both in markets where financial
loss statement (P&L) may be adversely sector restructuring and consolidation
affected. On the other hand, these are are still pending, and in markets where
mergers that would make sense from an sizeable mergers have already occurred
industry perspective and that, given the but where other transactions may still
characteristics and position of the entities, be in the offing, the most typical form of
would bring about the creation of solvent, consolidation will continue to be, at least Contributor
competitive institutions. for some time, consolidation among
domestic entities.
Consolidation also raises the question of
whether it should be cross-border within In conclusion, the European financial
Europe or whether domestic integration sector continues to struggle in a
should prevail. highly complex scenario where
limited profitability, a new wave of
Although the ECB, among other
regulation and difficulty in gathering Francisco Uria Fernández
legitimate voices, has promoted cross- KPMG in Spain
profits through efficiency gains from
border mergers, there are several reasons E: furia@kpmg.es
technological investments (digital
why, with exceptions, these have not Paco is a Senior Partner with KPMG in
transformation) in the short or medium
materialized for banks in the eurozone for Spain and the EMA Head of Financial
term, create a situation in which the only Services, Banking & Capital Markets.
some years, even within the scope of the
strategy within reach appears to be cost A qualified lawyer, he holds a Doctorate
Single Supervisory Mechanism. The main
cutting. There are not many elements of Law (Banking Regulation) from the
reasons for this are limited expectation
that would lead us to believe that the Complutense University of Madrid.
of drumming up business and modest Paco has also authored a number of
situation is going to improve in the near
profitability, as well as the uncertainties publications mainly related to financial
future.
that a merger always brings with it. regulation.
12 | Frontiers in FinanceVoices on 2030
The Future of Financial Services
The digital disruption of financial services is well underway, from the explosion of fintechs to the opening up of financial services. But
what will the industry look like when the dust has settled? KPMG spoke to prominent figures from fintech to big banks, insurers and
asset managers to software providers and social enterprise — who shared their vision for the future of financial services.
kpmg.com/voices2030
“In 2030, the whole survival game is: “Speed and adaptability is the new
are you in the right ecosystems?” competitive battleground.”
Piia-Noora Kauppi Claire Calmejane
Managing Director, Risk Product Owner,
Finance Finland Lloyds Banking Group
“In 2030, the question will be how “Be ready for an open ecosystem.”
much does the financial sector
contribute to sustainable development.”
Sopnendu Mohanty
Sasja Beslik Chief FinTech Officer,
Sustainable Finance Expert Monetary Authority of Singapore
“With open insurance you will have “Finance will become more
the ability to connect services and accessible and frictionless.”
fetch data to make really interesting Nick Middleton
services for the end customers.” Executive Director,
Kristin Linmark UBS Wealth Management,
CIO, SPP Head of UBS SmartWealth UK
“Our platform is going to allow “Insurance will be more predictive
us to do more intelligent risk in 2030.”
management.” Blair Turnbull
Managing Director,
Ning Tang Digital & Retail
Founder and CEO, CreditEase UK and International, Aviva
“All these ecosystems will be totally “Data analytics will form the core of
frictionless for a customer.” your financial crime unit by 2030.”
Sébastien Marotte Colin Bell
Europe, Middle East and Africa leader, Group Head of Financial Crime Risk,
Google Cloud HSBC
Frontiers in Finance | 13Creating efficiencies
Capturing the
benefits of
simplification
Hessel Verbeek, KPMG Australia
Ian Smith, KPMG in the UK
F
inancial services
executives know they
need to simplify their
organizations to support
sustainable growth and to
adapt to secure a successful
tomorrow. But are they
approaching simplification in
the right way to thrive in the
longer term?
14 | Frontiers in FinanceCreating efficiencies
Everybody knows that most financial However, dig into the investment case
services organizations, apart from the behind many of these initiatives and —
most recent disruptors, are far too interestingly — most are founded on
complex. There is a huge amount of
legacy that is impairing the ability to
return and efficiency metrics such
as Net Present Value (NPV), Internal We are seeing
adapt and meet the rapidly evolving
needs, requirements and expectations of
Rate of Return, and cost and head
count reductions. Of course, these are
some banks
customers. Customers want convenience,
efficiency, information, education and
important metrics: Shareholders expect
returns and competitors are differentiating
and insurers
seamless, frictionless experience across on cost and efficiency, but these should replace key
multiple channels at a time that suits
them. They expect rapid deployment of
not be the only drivers.
elements of
new tools and innovations, which are not
just relevant, but also engaging. They are
Go beyond efficiency
Cost efficiency is far from the only benefit
their core
looking for transparency and trust. that can be accrued from simplification. systems and
Simply put, they want their banking,
insurance and investment transactions to
Simplifying what you do today doesn’t
necessarily set you up for future success consolidate
be simple. And most of today’s financial
services organizations are anything but
if the market is changing rapidly and
business models are being disrupted.
their ancillary
simple. Simplification also has to support
changing what you do tomorrow.
systems in
Nothing simple about it A simplified architecture can also support
an effort to
It’s not for lack of trying. Most financial
services firms are now executing on
innovation, for example, developing,
testing and launching new propositions
rationalize
dozens — sometimes hundreds — of and getting to market faster and cheaper. their IT estate,
different initiatives that, ultimately, should
simplify the business. Some of these
For example, a simplified core banking
system would allow firms to make modernize their
efforts represent unprecedented change
agendas, with all of the associated bear
upgrades and integrate new technologies
in a fraction of the current time. Entering
capabilities,
traps. KPMG member firms are seeing
some banks and insurers replace key
into new alliances and partnerships will
be more feasible and viable for a simpler
reduce costs
elements of their core systems and business. and, at the
consolidate their ancillary systems in
an effort to rationalize their IT estate,
It should also support scalability, reduce
future cost, increase the speed of change
same time,
modernize their capabilities, reduce
costs and, at the same time, provide
and provide improved risk management provide the
the capabilities to adapt and evolve their
business models to secure future growth.
and resilience. Straightening out the
spaghetti bowl of systems and processes capabilities
Others are working on more focused
also creates better visibility which, in turn,
should allow financial services firms to
to adapt and
pain points and complexities. Some
are rethinking the fundamentals of their
get much closer to customers, improve
operational resilience and control over
evolve their
products and their wider portfolio of performance, and better understand business
products. Others are examining their
current financial, business and operating
and anticipate risks. Simplified control
environments and processes should models to
models, and outsourcing arrangements.
Many are working on simplifying specific
help organizations adapt quickly to future
regulatory changes.
secure future
client and risk pain points like KYC, claims
and remediation.
Perhaps most importantly, simplification growth.
of the business allows decision-makers to
Simplification is as much about creating focus their scarce capital on investments
and applying the capabilities to support that actually matter to the business and
improved customer experiences, its customers. Just imagine the clarity of
innovative propositions, speed and mind that would come from overseeing
automation, scalability and increased a vastly simplified financial services
visibility as it is about cost efficiencies. operation. IT budgets would be focused,
Frontiers in Finance | 15Creating efficiencies
Five steps to simplification
01
Clarify the financial
organization’s
strategic focus (such
as purpose, role, client
focus, experience
requirements, value,
ease, innovation) and
make clear choices
around competitive
positioning. This will
02
Choose a direction for the business architecture
drive strategic choices (such as the assembly of customer journeys,
around the organization’s distribution and operations). Many financial institutions
architecture and are organized along product and channel lines, giving
operating model. rise to silos, which need to be broken down.
Typical considerations for business architecture include:
— customer journeys, segments and product needs
— sales and service approach (e.g. by channel vs.
integrated) and incentivization (e.g. profit or cost
centre)
03
Determine which — multi-brand management and fulfillment
activities are — high level systems architecture
strategic and provide a
competitive advantage, — operations and technology, including centralized
given the organization’s services between divisions.
agreed focus in the
first step. This will
drive choices around
which activities should
04
Assess the simplification options for the
be retained in-house organization’s activities in line with its strategic
and which could be focus, its business architecture and the (strategic)
outsourced. nature of its activities. Four main options should be
considered for each activity:
— CoE creation: Leverage current capabilities with
potential for high performance. This is likely to be
the adoption of a current Centre of Excellence
(CoE) for the wider organization (e.g. migrating
Develop the all secured and unsecured consumer credit
simplification road assessments to the state-of-the-art mortgage
05
map, taking into account credit assessment platform).
various dependencies.
— Transformation: Transform existing assets/
The road map will be
capabilities that are not restricted by legacy issues
bespoke for every
(e.g. HR management supported by a newly
organization, given
implemented cloud-based ERP system).
their vast differences
in starting position, — Development for replacement: Build a new
strategic activities and unconstrained capability to take over activities with
simplification options. In too many legacy issues to be transformed (e.g.
order for the change to be full replacement of firmwide data and analytics
delivered, the following functions by a central hub).
must be aligned across — Third-party solutions (including partnering/
the business — clear outsourcing): Consider third-party solutions
roles and responsibilities for non-strategic activities that are not high
and sponsorship to drive performing. Decisions should be based on
and ensure ruthless reduction of complexity, organizational rigidity or
execution. risk, rather than on productivity alone.
16 | Frontiers in FinanceCreating efficiencies
innovation investments would be highly tape and glue. Nobody really knows for
targeted, and waste and duplication sure what the unintended consequences
would be eliminated. Every investment are when ancillary systems are shut
dollar would count towards the long-term down. The challenges and risks of major
health of the organization. transformations are significant.
Making the case Take it from the top
Financial services executives are well Simplification should never be the Contributors
aware of the benefits of taking a broader primary objective in and of itself. When
view on the case for change, beyond cost. simplification is the only objective,
They know that improved capabilities, investments in improvements and
agility, risk management and investment innovation will get penalized. But that only
prioritization is inherently valuable to the reinforces the status quo.
organization over the long term. But they
While assessing and quantifying the non-
often aren’t sure how to quantify them
cost benefits can be challenging, it is not Hessel Verbeek
and reflect them in the investment case.
impossible. We help banks, insurers and KPMG Australia
That is not surprising. What value do asset managers do it all the time. It does E: hverbeek@kpmg.com.au
you put on getting an as-yet-undefined need a strategic mind-set and a more Hessel leads KPMG’s bank strategy
practice in Australia. With more than
product to an as-yet-undefined market in holistic assessment of the broader and
20 years’ experience in strategy
an as-yet-undefined space of time? How longer-term benefits that simplification consulting, Hessel helps organizations
do you quantify the value of decision- can deliver, including support for future make the necessary but difficult choices
making clarity in financial terms? What growth. Where the NPV isn’t adding up required to remain competitive in
does a happy and satisfied customer look but the full benefits are obvious — this is today’s rapidly changing industry. He
like on a balance sheet? These are not worth the effort. believes that the sector needs to focus
simple calculations to make. on simplification of its strategies and
Instead, financial services organizations operations in order to best serve its
The problem is that the ‘harder’ benefits need to see simplification as the vehicle customers and other stakeholders.
of the investment case — the cost and to get to a faster, leaner, more agile and
risk considerations — are very clear. more customer-centric future, supporting
Simplification often requires organizations new business models to deliver long-
to break the status quo. Sometimes that term, sustainable and profitable growth.
may mean investing into new systems, That will be the only way to thrive in
tools or capabilities. It may require new tomorrow’s uncertain environment.
financial, business and operating models Ian Smith
We believe that the best way to
and ways of working. Investments will KPMG in the UK
make sure that simplification is given E: ian.smith@kpmg.co.uk
be high and no amount of head count
heavy weighting is by ensuring that Ian is a financial services strategy
reduction will balance the equation in the
simplification is an inherent enabler to Partner based in London. He specializes
short term.
the core strategy; embedded and driven in helping banks, insurers and asset
Somewhat counter-intuitively, many from the top down and shared across all managers understand how markets
executives are also worried about the divisions, functions and markets. With are evolving and identify future winning
business and operating models to
risk of removing the complexity. They clarity of objectives underpinned by a
secure sustainable growth. Ian has
recognize that some of their current strategic decision to simplify, the question worked extensively with many leading
systems, processes and models are stuck of how to quantify all the simplification financial services organizations on these
together with the IT equivalent of duct benefits becomes less sensitive. complex and critical issues.
Frontiers in Finance | 17Creating efficiencies
Accelerating
transformation:
Beyond signing the deal
Ram Menon, KPMG in the US
Giuseppe Latorre, KPMG in Italy
F
inancial services firms are
looking to inorganic growth
opportunities to accelerate
transformation. And that puts M&A
and corporate development teams on
the front line of the transformation
strategy. Are they ready?
18 | Frontiers in FinanceCreating efficiencies
As the pace of disruption picks up speed Taking a new view on value
and traditional sources of value start The problem, in our experience, is
to shift and dissolve, many financial that far too many banks, insurers and
services executives recognize that ‘more
of the same’ is no longer a sustainable
asset managers continue to approach
transformative deals and partnerships as
...46 percent
strategy in the long run. Transformative
changes must be made. They must be
if they are no different from the deals they
have done in the past.
of financial
made quickly, and they must be executed
strategically. The reality is that they need to be
services CEOs
The most prudent also understand that
approached differently. The vast majority
of deals historically were focused on
said they now
the type of transformative change they
require to compete in today’s rapidly
achieving scale. In those situations, see inorganic
evolving industry can’t be achieved
‘value’ was measurable from a short-term
perspective in terms of synergies growth
through organic growth strategies alone.
That has led many financial services
achieved and market share gains.
But when making deals for strategic
strategies as
CEOs to look outside their organization transformation purposes, ‘value’ is
typically perceived from a longer-term
the fastest
for new sources of inspiration to achieving
their transformation objectives. In fact, in perspective, and thus becomes much way to
a recent global survey of financial services
CEOs conducted by KPMG International,1
more difficult to define and measure.
The first step, therefore, is for financial
transform
46 percent said they now see inorganic
growth strategies as the fastest way to
services CEOs and their M&A and their business
transform their business and operating
Corporate Development teams to
clearly define future ambition and and operating
model. design executable strategies that align
with and enable the organization’s
models,
The sprinters have left the blocks
Many have already started focusing
transformative goals. according
on executing the type of acquisitions, Defining future ambition to KPMG
divestitures, alliances and partnerships
that they hope will enable them to achieve
Everything should link back to value.
Understanding the ‘true’ potential value
International’s
their transformation objectives. Our view
of the market suggests that the insurance
of an acquisition or partnership can give
CEOs more confidence going into a deal
CEO Outlook
industry — generally speaking — has
been relatively more active in this regard;
and help ensure that their M&A and survey.
Corporate Development teams achieve
many of the larger banks are only just the value that was expected at the outset.
starting to catch up (particularly around
the payments part of the business). More than simply working with the
business leaders to define and understand
Yet KPMG professionals’ conversations their future ambition, the key to success
with financial services executives suggest is in using that information to reorient the
that many of those at the forefront are way the dealmakers think about everything
increasingly finding themselves struggling from deal origination and valuation through
to convert their desire for transformative to structuring and integration. It’s about
deals into actual results and value. Several making sure there is strategic alignment
deals and partnership agreements are being between the business leaders and the
contemplated or have been signed. But, for transformative deals being pursued.
the most part, not much has changed from
a transformation perspective. Frustration The pitfalls of making deals without this
levels are rising, as post-deal transformation critical first step are myriad and far too
remains a challenge. common. We have seen financial services
firms snap up unique fintech companies
Our view suggests that banks and only to squash their uniqueness with
insurers could be doing more to ensure bureaucratic controls and force-fit
their transformative deals actually enable cultures. Others have invested early into
the desired transformation, and deal innovative technologies and then failed
execution is geared towards maximizing to appropriately integrate and scale the
and accelerating synergy capture and innovation across the enterprise.
value creation.
1
Global CEO Outlook 2019, KPMG International
Frontiers in Finance | 19Creating efficiencies
The truth is that even the most the transformation of the organization
tough-minded business leaders can ‘fall in towards ‘acting as one’.
love’ with a potential acquisition target and
In our experience, post-deal business
misjudge its present worth, potential value
and long-term suitability as a strategic
transformation and integration initiatives
require well-informed decision-making
... when
acquisition.
processes with respect to the strategic making deals
Those that get this first step right,
however, are the ones that make sure
choices to be made for the combined
organization. Identifying integration for strategic
the ‘front end’ of the dealmaking funnel
is pointed in the right direction to achieve
options for the prioritized operating model
choices (varying the degree of integration
transformation
the organization’s strategic transformation
objectives. They are targeting investments
and the sequence of integration) is critical
for maximizing and accelerating synergy
purposes,
they already know they can integrate into capture and value creation. ‘value’ is
their business. And they are buying assets
they are confident can scale and adapt as
Clearly, each deal and partnership
opportunity will be different;
typically
the organization grows.
understanding and responding to the perceived
Designing executable strategies nuances of each situation will be key. It
is therefore important to have the ability from a
Sourcing the right strategic deal and
partnership opportunity is one thing.
to track — and the agility to ‘course
correct’ — any deviation to the proposed
longer-term
The ability to strategically integrate them
in a way that enables the organization to
value creation plan and attainment of the
defined future ambition.
perspective,
transform and deliver the value expected
is another thing entirely. But here, too, Ultimately, the point is that more work
and thus
CEOs and their M&A and Corporate needs to be done at the front-end and
at the back-end of the deal to ensure
becomes much
Development teams have a critical role
to play. More often than not, deals are that the deal and/or partnership enables more difficult
signed and then ‘tossed over the wall’
for the business leaders and functional
the desired transformation and value is
achieved. If transformation is the ultimate to define and
executives to deal with. goal, the days of simply ‘doing deals’ and
‘tossing over the wall’ are over.
measure.
KPMG member firms’ work with
leading financial services institutions Ready for what’s coming
suggests that not enough time is spent
Financial services institutions are
working with business leaders and other
expecting their M&A and Corporate
internal stakeholders to plan ahead for
Development teams to help them deliver
the integration prior to signing the deal.
on their transformation objectives.
Successful integration of deals that
are done for strategic transformation Those who are quick to adapt their
purposes require strong leadership, dealmaking and partnership strategies to
robust governance and relentless reflect the transformation objectives of
orchestration across the enterprise — the organization — from deal identification
addressing critical people, process, through to post-deal integration — will
systems and (perhaps most importantly) not only be better placed to achieve the
cultural issues. transformative value they expect, they
will also be better placed to pivot as the
Clarifying the degree of integration
markets shift.
and level of effort required to maintain
focus on value realization, problem Those serious about delivering
resolution and value creation is typically transformative outcomes, therefore, may
underestimated. Addressing cultural want to start by talking to their dealmakers
issues in both the acquiring company and on how to enable organizational
the acquired company will help accelerate transformation.
20 | Frontiers in FinanceCreating efficiencies
Successful integration of deals that
are done for strategic purposes
require strong leadership, robust
governance and relentless
orchestration across the
enterprise — addressing critical
people, process, systems and (perhaps
most importantly) cultural issues.
Contributors
Ram Menon
KPMG in the US
E: rammenon@kpmg.com
Ram leads the Insurance Deal Advisory
practice KPMG in the US and KPMG
International. He has led many domestic
and cross-border mergers, acquisition
and divestiture projects, providing deal
and strategy-related advisory services.
Giuseppe Latorre
KPMG in Italy
E: glatorre@kpmg.it
Giuseppe heads the Global Financial
Services Deal Advisory practice for
KPMG International. He has extensive
experience leading large scale M&A
operational projects, including tender
offer on listed entities, company
valuations, bonds and equities issues
for various Insurance companies, and
in drafting strategic business plans for
medium-term financial institutions.
Frontiers in Finance | 21Digital models take hold
Agility with
discipline:
Transforming MUFG’s
Transaction Banking business
Ranjana Clark, Head of Global Transaction Banking, MUFG
Chris Hadorn, Head of Global Payments, KPMG International
E
veryone talks about the need for
transformation on the consumer
side of the banking business,
but what about the strategies that
underpin global trade and finance: How
is Transaction Banking changing to keep
up with evolving customer needs and
increasing competition?
22 | Frontiers in FinanceDigital models take hold
Ranjana Clark has no doubt that processing of payments, or maybe
transaction banking is at the front end it means more automated and cost-
of a period of massive disruption. As a effective cross-border transfers. You
former executive at PayPal and Western
Union, she has spent the past few
really need to start with an understanding
of your customers’ needs.” Right now,
decades orchestrating and managing
market disruption in the payments space. Focused transformation
markets around
Today, she is Head of Global Transaction For Ranjana and her Transaction Banking the world are
Banking and Head of Transaction
Banking Americas at MUFG (one of the
Americas team at MUFG, the approach
to transformation is centered on four moving towards
world’s five largest banks by assets),
and Ranjana recognizes that she is, once
main pillars.
‘open’ architecture
again, staring at the onset of managing a
The first is to create a front end that is
intuitive and easy to use. As Ranjana models. We need
large platform that is ready for change. notes, consumers now expect their
banking services to be as easy to
to make sure that
Ripe for disruption
“Generally speaking, payments and
use as Amazon or Facebook. Those
expectations are bleeding into the world
our transformation
transactions can represent pain points for of Corporate Payments. initiatives are
clients, and that creates a lot of room for
technology-led disruption,” she noted.
The second pillar is around open data
and open banking. “Right now, markets
moving us towards
“Particularly in developing markets —
but also here in the US — using money
around the world are moving towards an open banking
isn’t easy. Moving money across borders
is also particularly difficult. The whole
‘open’ architecture models. We need
to make sure that our transformation environment.
initiatives are moving us towards an open
area is ripe for disruption.”
banking environment which, in turn, will
The size of the prize is also luring in a open opportunities for us to serve clients
range of new players. From VC investors in new and secure ways.”
to fintech upstarts and tech giants
Similarly, Ranjana’s team is continuously
(Facebook’s new Libra currency being the
exploring how emerging technologies
most obvious), there is a massive amount
(such as machine learning, artificial
of capital pouring into new payments and
intelligence, and natural language
transaction technologies and companies.
processing) might help the organization
The field of competition is getting larger.
achieve its transformation goals faster,
Customer-led more efficiently and more effectively.
“AI may be hugely overhyped in the
Like most banking executives, Ranjana market, but it is still the trend that has the
recognizes that it is the client that is at longest legs and most value to deliver to
the center of today’s digital disruption. the banking sector,” she noted.
Customers — even Corporate Treasurers
and CFOs — are starting to demand The final pillar — or maybe more
more efficient and accessible services. precisely, foundation — is a flexible and
And that is influencing the transformation agile core banking system. Like most
road map within Transaction Banking, banks, MUFG is actively working to
globally. modernize its core banking systems and
infrastructure. Banks want to deliver
“Whether you are talking to consumers efficiency and offer the most current
or the Head of Treasury, everyone has capabilities, all while maintaining safety.
the same basic needs,” she noted. “Our focus there is to move into the
“They want to save time, save money cloud while ensuring the highest levels of
and stay secure. For corporate clients, security,” Ranjana said.
that may mean better straight-through
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