Digital Transformation in Financial Services - Financial ...felaban.s3-website-us-west-2.amazonaws.com/... · In 2016 a big bank also doubles as an enterprise software company and

0© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No

member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Digital Transformation in Financial Services -Financial Innovation & Fintech

November 2016

–

Oliver Cunningham | Partner, Financial Services Consulting | KPMG Brazil



The Incumbent’s challenge

Tomorrow's FS Challenges

The Digital Transformation Journey

Today’s FS Challenges

Why is Fintech Happening Now?


member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.2© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No


In 5 years,

the way we

access our

Money will

be totally

different

68%

53%33%

33%

Believe they

won’t need a

banking

institution at

all

Don’t think

their banks

offer anything

different than

other banks

Are open to

switching

banks in

the next 90

days

80+ million millenials

are seeking disruption

“Innovation will come

from outside the

industry”

“I don’t see the

difference between my

bank and all the others”

What is driving the Innovation in banking and Digital Disruption?




Customer-centricity:From rhetoric to reality

88%

Get to Know Me!

Find it frustrating when providers

fail to keep their service promise

Know what I could be looking for –

solutions based on life events – “Me

tailoring”

Maintain the customer’s service

promise

Have my best interest at heart

85%

Enable Me!

Are frustrated when a company is

not easy to do business with

Transact anywhere, anytime and anyhow

Be simple and transparent

58%

Delight Me!

Are frustrated with inconsistent

cross-channel experiences

Provide a seamless and consistent omni-

channel experience

Personalize my user experience

Expand services to the moments that

matter to me

79%

Get to Know Me!

Are frustrated when a company

redundantly markets the same

offers

Understand what I think and want

Use insight to engage me in relevant

interactions and offers

Recognition through loyalty offers

Industry studies estimate a significant portion of a financial institution revenues (as high as 40% for Banks) may be at risk by 2020

without more relevancy to customer needs….




We are in the midst of a digital and mobile revolution

DIGITAL and MOBILE

technologies are transforming the way

we live and work.

The #1 and #2 drivers of business

transformation*

• CUSTOMER EXPECTATIONS

• DISRUPTIVE TECHNOLOGY

of companies are in some phase of

CHANGING THEIR BUSINESS MODEL*

93%

* Source: 2013 KPMG Technology

Innovation & Business Transformation

Surveys




Mobile!

CONTACT

CENTER

1,4 bn transactions

-7% of reduction from 2014

BANKING

CORRESPONDENTS

1,4 bn transactions


10 bn transactions -2% of

reduction from 2014

17,7 bn transactions


7,8 bn transactions

8% growth from 2014 *

4,4 bn transactions


11,2 bn transactions

138% growth from 2014

High

Low

Cross-selling(Increase Stickiness)

Loyalty(Client Intimacy)

Retention(Be the main bank)

**

BANKING

DISTRIBUTION

CHANNELS

INTERNET

BANKING

MOBILE

BRANCH

POINT OF

SALE

ATM

Sources: *Febraban – Brazilian banking

federation | **BBVA Innovation Edge |

***Cisco IBSG | Winning Strategies for

Omnichannel Banking

Brazilian banking channels:




What is meant by ‘Digital Disruption’?

Digital disruption is the change that

occurs when new digital technologies

and business models affect the value

proposition of existing goods and

services.

01

02 There are 3 sources to the digital

power, that make the Digital

disruption possible

03The Digital disruption completely

changes the traditional disruption

Trad

itio

nal d

isru

ptio

n

Restricted to a select group of entities

High investments

Few ideas

Dig

ital d

isru

ptio

n

Accessible to a large audience

Low cost digital infrastructure

Applicability of several ideas

Open source development platforms

Free digital tools that can rapidly

build new products and services

Digital platforms which can be exploited by competitors

Rise of a digital consumer

class

Source: Unleashing the next wave of

innovation, James Mcquivey




Digital disruption has been happening for a while on various industries…

>US$10b revenue, >US$250b payments, Market value greater

than all listed Banks in Germany

330% larger than PayPal, 96% of

online payments in China do not involve

a Bank

DIGITAL DISRUPTION

WHAT ALL THE PLAYERS ABOVE HAVE IN COMMON ?

Asset Light

Data Rich

Platform Based and

Client Oriented

They are

Whatis a bank?

“The question is so simple it seems silly: What is a bank?

Of course you know the answer. A bank pools savings and then allocates that

capital. Simple, right? But that’s just the start. In 2016 a big bank also doubles

as an enterprise software company and a mobile-apps developer. It is a

customer-service organization to big companies and individuals alike. It is a

tool of government-mandated social policy. A shareholder-return engine. An

international intermediary. A seller and trader of securities. A policeman of

criminals. A policeman of itself.

I was impressed. Why? Because this is the dilemma we all live with

today. So many companies are now technology firms who happen to do

X. Uber is a technology company that happens to do rides. Amazon is a

technology firm that happens to do shopping. ”

Chris Skinner






The Incumbent’s challengeToday’s

FS Challenges




‘Today’ challenges…customer experience priorities

Top Goals for Financial Services Companies: Achieve revenue growth Improve cost optimization Improve customer experience Adhere to regulatory and compliance

Cross-Selling

Self-service Channel Usage

Channel Performance

Customer Acquisition

Efficiently bundle products and

service to drive cross-selling and

up selling

Effectively offering consistent customer

service throughout multiple channels and touch points

Collect continuous feedback from voice of customer to understand and change the customer interactions and increase customer retention

Shift focus from products and services to customers while consistently messaging customer experience across company

Streamline the processes around awareness building, engagement, on-boarding, sales, and support to drive higher acquisition

Customer Retention




Creating a seamless and personalized brand and engagement experience across all channels.

Interaction Points

Phisical branches“Customer will come to

us”

On-line“We need to be on-line”

Multi-channel“We need to interact

across channels ”

Omni-channel“We need to create a seamless conected

experience”

2000 2007 2013 2030

Bricks and Mortar

From the customer’s perspective, omni-channel banking continues to offer access to financial services across a variety of channels and introduces more consistent interactions with the banking brand across the various touch points. The bank will be able to analyze the information being fed in from different channels so that it can build up a detailed and accurate picture of the customer’s preferences and behavior

eCommerce

Mobile

Social

Apps

Today’ challenges…customer experience priorities




Legacy SystemsEnablersOmni-Channel

Channels

Are we agile enough?

The future banking ecosystem will deliver enhanced product capabilities through differentiated channel structures. Partnering with innovators will deliver leading-edge capabilities, reducing the strain on banks to process transactions so they can focus on higher-value sales delivery activities.

CustomerExperience

ORIGINATE

TRANSACT

SERVICES

Mobile

Internet

Branches

Chat

IVR

Call Center

Savings

Checking

Loans

Card

Lending

Traditional checking and

savings products converge into

deposit accounts

Method to deliver banking and

payment services

Converge in favor of multiple,

dynamic, targeted, and personalized

lending products

Funding for payment activities

Customer Analytics / BI

ANALYTICALSOLUTIONS

ANALYTICALSERVICES

ANALYTICALENGINES

BIG DATAINTEGRATION

Data

CRM

SALES SERVICE

QUALITY SUPPORT

Social

ATM/POS

CUSTOMERDATABASE

JOURNEY

OPERATIONAL MODEL

PROCESS

PEOPLE

ITCUSTOMER ACQUISITIONCUSTOMER RETENTION

CROSS SELLING

REVENUE GROWTH

COST OPTIMIZATION

SELF-SERVICE CHANNELCHANNEL PERFORMANCE




Today’s FS Challenges






Rethinking the value chain

BANK

Traditionally banks operate and own all of the 3 major blocks of its operating model:

Customers

Origination

Product Provisioning

Capital Allocation

BranchInternet

BankingATM

Contact

Center

Banking

Correspondents

Front

office

Back

Office

Client

Analytics

Risk

Management

Middle

office

Capital

reservesLoss

Provisioning

Governance

Mobile




…owning the relationship or participating in a value network

Customer Base

The key asset is

the consumer

relationship

Cash

management

Credit card

Insurance

InvestmentsLoans

Payments

Risk

Management

Savings

ExchangeGoods and

assets

Receive and

payments

Fintech companies

will provide the mass

of services

distributed in a

platform to the

customers

Intelligent, data based,

contact with customer,

allowing cross/up sell

Origination

Product Provisioning

Capital Allocation

Data RichAsset lightPlatform Based

Tailored products offered in

accordance with optimization

of customer journey

BANKING AS A PLATFORM




The ‘Piranha attack’

Source: CB Insights | Unbundling of a

Bank - Wells Fargo




Unbundling traditional banking –SME Segment

Source: CB Insights | Unbundling of a

Bank - Wells Fargo




The ‘tomorrow’ challenges

CHANGING THE LENDING PARADIGM

ALTERNATIVE FINANCE MODELS (P2P /

OTHER)

CREDIT ANALYTICS (API TECH)

ALTERNATIVE DATA SOURCES

RETAIL BANKING

BEHAVIOURAL THEORY

CUSTOMER CENTRICITY & EXPERIENCE

IDENTIFICATION & AUTHENTICATION (BIOMETRICS TO IMPROVE PROCESSES)

STRUCTURE OF RETAIL BANKING –

SHUFFELING THE STACK (PLUG & PLAY)

FINANCIAL INCLUSION AND THE

UNDERBANKED

BANKING ON THE ‘OLD NOKIA’ VIA TXT

API TECH & ALTERNATIVE DATA

SOURCES

VIRTUAL TRESURIES & VIRTUAL

CFOS

CORPORATE BANKING

BLOCKCHAIN & PAYMENTS

SMART CONTRACTS & DERIVATIVES

ROBO ADVISORY

INVESTMENT MANAGEMENT

SHIFT FROM TRANSACTIONAL TO

CUSTODIAN OF WELL BEING

COST TAKE-OUT (AI & ROBOTICS)

FINANCIAL SUPERMARKETS AND DIRECT

DISTRIBUTION

REAL TIME PRODUCT/SERVICE

DESIGN

SHIFT FROM TRANSACTIONAL BANKING TO

CUSTODIAN OF FINANCIAL WELL BEINGONLINE INSURANCE MARKETPLACES

AND HOMOGENIZATION OF RISKS

INSURANCE

MASS CUSTOMIZATION - CONNECTED

DEVICES DATA (IOT, WEARABLES)

SHARING ECONOMY




The Internet Of Value

3.2 Smart Contracts

The entire slate of economic, market and f inancial appl ications using blockchain

Transactions more complex than cash (Bonds, stocks, loans , t i t les…)

3.3 Blockchain Beyond Currency

Deployment in areas of government, health, science, l iteracy, culture and art .

Ethereum: Turing completeness

3.0 INTERNET of VALUE

Blockchain Era

2015 +

Blockchain appl ications related to cash, such as transfer, remittance and digital payment system

Money exchanging at the speed in which information moves today

E-currency and the el imination of the financial middleman costs

Crypto Currencies3.1

Profound disruption in financial services

INTERNET of INFORMATION

The Internet Era1.0

The f irst wave of the internet allowed instantaneous f low of Information

Search and connectivity features

Disruption in the music markets through P2P sharing

1990s

SOCIAL INTERNET

Mobile Era

2.0

2000s

Better infrastructure at lower costs enabled the online inclusion of SMEs and commerce at a P2P level

Mobile diffusion allowed the instantaneity of services (banking, uber, commerce)

Rise of social media and user generated content.

Folksonomy, the “Tagging phenomenon”

Broader bands allowed video streaming disrupting Cable / TV industries




Re-shaping financial services…

FINTECH ECO-SYSTEM

INFRASTRUCTURE

Blockchain – the distr ibuted ledger providing Operat ional Infrastructure

Digital Ident ity – user ver if icat ion with the transparent and immutable nature of blockchain

Pr ivacy – consumers can share their data as they see f it

Cybersecur ity – lower l ikel ihood of human error & system near impossible to manipulate

MARKETS

Predict ion markets - Speculat ive markets that enable users to bet on the probabi l i ty of a event

Social t rad ing – pooling of knowledge that informs the col lect ive decision-making

Automated advice - Electronic response systems able to formulate basic f inancial plans

High-frequency t rading – Split -second, algor ithm-based trading

PAYMENTS & E-CURRENCY

Digital Currencies – Money is stateless, intangible, and easi ly traceable

Peer-to-peer t ransfers – Eliminat ion of the middleman, bank or broker

Mobi le Banking – Unprecedented access to f inancial services

The Internet of Things – Machine-to-machine commerce

Source: MIT Media Lab

MARKETPLACES

SME Enablement – Innovat ive technology companies are assist ing SMEs in sett ing up the digital infrastructure

Capital Raising – Funding through large groups of investors through onl ine marketplaces

Shar ing Economy – Consumption of products and services on a peer-to-peer basis

F inancial Inclusion – Provide the world’s “unbanked” with unprecedented access to f inancial services

P2P Lending – platforms that match lenders direct ly with borrowers

Risk Transfer – Insurance pools made of pol icy holders that are connected to each other by a platform




… Traditional banks face cultural barriers to adapt to the Fintech environment

Major cultural obstacles for banks when compared to Fintechs:

Banks do not

have a clear

strategic

vision for

digital

01

Their culture

is not suited

to rapid

change

Banks are risk-

averse and

reluctant to

embrace

disruptive

projects

Banks fail to

recruiting/

retaining

technology

talent

Lack of

clarity on

Fintech

opportunities

to pursue

03

02 04

05

“The danger to banks is not corporate oblivion like

that experienced by travel agencies or Eastman

Kodak. The danger is that innovative business

models take a bite out of every part of banks’

product portfolios— skimming off their best

customers and driving down fees”

“In their worst-case scenario, banks become

commodity providers of back-office functions, with

lower growth and squeezed margins”

Risk faced by the current banking culture If the banks shift their culture

With the changes the banks will be the custodian

of the client’s financial well being, rather than the

full provider of financial services

They will need reinvent its product development

cycle

Meet changing customer needs with new offerings

Leverage existing data and analytics

01

02 03

Source: The Economist Intelligence Unit

Limited 2015




The benefits of Fintech and Blockchain in Financial Services will be achieved in three horizons of digital transformation

HORIZON 1 – EXTEND AND DEFEND CORE BUSINESS

HORIZON 2 – BUILD EMERGING BUSINESS

HORIZON 3 – CREATE VIABLE OPTIONS

TIME

PACE

OF

INN

OVAT

ION

AN

D VA

LUE

TO T

HE O

RGAN

IZAT

ION

S

R&D

Based on Baghai, Coley, White – “The

Alchemy of Growth”

Corporate Venturing

Operational ImprovementBack Office Efficiency




Delivering actionable insights from Data & Analytics

Although most companies report to be using D&A, according to a

KPMG research with 830 senior business executives indicates that

most are struggling to achieve desired outcomes.

SEVEN INSIGHTS TO VALUE: KEY TAKE-AWAY

ADDRESS THE ISSUES YOU ARE FACING

UNDERSTAND THAT THE INSIGHTS DO NOT COME FROM DATA ALONE

GO BEYOND POINT SOLUTIONS

DEFINE WHAT VALUE YOU ARE LOOKING FOR

FOCUS ON CUSTOMERS

ASK THE RIGHT QUESTIONS

MEASURE YOUR SUCCESS

Source: KPMG International survey -

Going beyond the data: turning data

from insights into value 2015. Survey

data collected from 830 senior business

executives across 15 countries. Aug

2014 and Jan 2015.

FASTER DECISION MAKING

IMPROVED DIALOGUE WITH CUSTOMERS

MORE ACCURATE DECISION MAKING

GREATER EMPLOYEE SATISFACTION

ENTERPRISE-WIDE ACTIONABLE INSIGHTS

BETTER-TARGETED PRODUCTS

REDUCED BUSINESS RISKS

INDIVIDUALIZED MARKETING

IDENTIFICATION OF NEW REVENUE STREAMS

PREDICTION OF FUTURE MARKET TRENDS

BE

NE

FIT

SOF

D&A

TO

CO

MP

ET

ITIV

EN

ES

S

58%of organizations have difficulties evaluating data quality and reliability

think they have all the talent and capabilities they need to fully leverage D&A

DOUBTINGTHE DATA

STRUGGLING FOR SUFFICIENT SKILLSONLY

14%

19%

MISSING THE MARKONLY

BIG

GES

T C

HA

LLEN

GES

TO

MA

KIN

G

DEC

ISIO

NS

BA

SED

ON

D&

A

say they are already ‘very satisfied’ with the insights their D&A tools provide

.1

.2

.3

.4

.5

.6

.7

80%

86%

67%

of respondents say they are already making more accurate decisions

of respondents say they are already making fasterdecisions

of respondents say they are already reducing business risk

EARLY ADVANTAGESARE ALREADY BEING ENJOYED

Capturing value from your D&A initiatives requires

three ingredients: actionable insights, strong

change management processes and executive

support.




How are Incumbent Banks Responding?

STRAIGHT

THROUGH

PROCESSING

AGILITY,

SPEED,

EFFICIENCY

A ‘Digital’ Bank continuously excels through the

use of the very latest technologies such as:

THEY ARE BECOMING ‘DIGITAL BANKS’…

CUSTOMER

ENGAGEMENT

DIGITAL

BANK

Mobile,

Cloud

IoT/IoE

Blockchains/DLTs

Cognitive

Computing

Analytics

Social Media

and more

DATA &

DECISIONS

Co-CREATION

PARTNERING

OPEN APIs




Incumbent FS Firms are Building Innovation Eco-Systems

INNOVATION ECO-SYSTEMSInnovate

rapidly and deliberately

Adopt a Portfolio Approach

Co-ordinate new growth

Right people with the right technologies

Analyze growth non-traditionally

Encourage intersections

Experiment, pilot, and early rapid revision (‘Lean’ concepts).

Create open APIs and use external APIs

Ask staff to mentor startups, participate in Ideations

Protect innovation teams from the rest of the firm

Vary innovation types Match pace to business

needs Nurture best bets Be prepared for failures

Cash flow from mature business to invest in new growth

Build alternative teams tasked with putting your own firm out of business (the ‘Kodak moment’)

Develop new methods of analyzing business opportunities

Prepared to cannibalize revenue streams

A generational paradigm shift, not granular project based business cases

Exchange talent throughout the organization

Engage outside innovators Get involved with

incubators, accelerators Host developer days for

local startups and entrepreneurs

Cash flow from mature business to invest in new growth

Build alternative teams tasked with putting your own firm out of business (the ‘Kodak moment’)

Build & protect innovation capabilities

Accessing a broader range of external

partners/providers

INTERNAL PARTNERSHIPS EXTERNAL

New products and business

model opportunities

Selling to / through tech-based or disruptive

companies

Equity stakes in high growth businesses and

acquisitions




The IT organization has to fundamentally change

‘Traditional’ IT Digital IT

Strategy

Translates business demands into

functional requirements so that IT can

produce

Explores digital possibilities in order to

continually drive business model

transformation

Role Reactive Proactive

Focus Operational Client

Triggers Internal External

Speed Slow Agile

Mind-set Planning Learning & Experimenting

Projects Large scaleIterative

Modus Operandi Plans / Builds / Operates Broker/ Integrator / Orchestrator

Systems Transaction Data

External Vendors Partners

ResultsBusiness as usual Business as UNusual




Yet many are still stuck in the‘today’ model

Diversification

■ Data Processing

■ Transactional

■ TI is an integral part of operations

■ IT costs

Value Generation

■ Data revolution / Insight integrates

products and services

■ Data analytics is central to

differentiation

■ Transactional / ERP is yesterday’s

problems

■ Security & Privacy remain perennial

“hot topics”

■ Sharing, partnering and mobile

■ IT drives true value

Unification

■ Standards

■ CIO gains relevance

■ “Business owners” by process

■ Transactional / ERP solutions

■ Master Data is a requriement

Past

Present

“Digital”

IT Delivers

efficiently

Transform IT

capabilities

Optimize IT

investiments

Drives Business

changes

Direct business

value

‘Today’ challenges ‘Tomorrow’

challenges




0

20

40

60

80

100

120

140

160

180

200

2013 2014 2015 2016

Run & Maintain Innovation

ExampleWhat is stopping organizations?

Barriers to Digital Transformation

Orçamento de TI

Δ

Δ

Δ

Classic IT trap:

Non discretionary spend reduced YoY

The transition in not a mere shift -

■ Leadership lacks the understanding of the

threat and the challenge

■ Resource and budget limitations

■ Legacy maintenance and efficiency is

prioritized

■ Risk Averse

■ Focus on cost and on short term

■ Governance designed for short term

■ Inability and lack of skills to partner, co-create,

design with customers




Enabling the change in IT in not ‘one size fits all’

Current StateTraditional Digital Ready

HIgh

LowD

igit

al A

mb

itio

n

Rupture

Business Strategy

=

Digital Strategy

=

IT Strategy

Normally Native

‘Digital’ means

nothing

Traditional IT

Strategy

Oliver CunninghamPartnerHead of TransformationFinancial ServicesKPMG, Brazil

Phone +55 11 3940 3115Assistant +55 11 3940 [email protected]




What is blockchain and its advantages?

Secure Architecturesecure protocol,

independent of physical

security (firewalls).

Immutability

RecordsReliance on the

information, perennial

registration, traceability.

“The blockchain is the public ledger of all Bitcoin transactions

that have ever been executed. It is constantly growing as

miners add new blocks to it. The blocks are added to the

blockchain in a linear, chronological order”

“Blockchain technology is a new network

architecture paradigm and software that

solves problems before insoluble”

01What is blockhain?

02What are the advantages of blockchain?

Access

ManagementPromotes trust, ensures

transparency.

Decentralized

ArchitectureResilience and trust,

collaboration. Reduces

costs.

TransparencyWhere necessary.

Promote confidence,

releases the information,

increases efficiency.

Consensus

MechanismsEnsures consistency of

information. right incentives

prevent fraud.Source: Ameerrosic, What is blockchain

finally a simple guide; Melanie Swan,

Blockchain; Catena




How Blockchain works?

Blockchain

The first block is

created online and

represents the

transaction

01

The blockchain is a way

to structure data, and

the foundation of

cryptocurrencies like

Bitcoin

02

The block is

broadcast to every

party in the network

03

Blockchain allows the

disintermediation and

decentralization of all

transactions on a global

basis

04

Those in the

network

approve the

transaction

and validate it

05

The new block is

added to the chain

which provides a

permanent, non

repudiable and

transparent record of

transaction

06

No single party has

the power to

tamper with the

records: the math

keeps everyone

honest

07

Source: Ameerrosic, What is blockchain

finally a simple guide; Melanie Swan,

Blockchain




RIS

K M

AN

AG

EMEN

T

PAYM

ENTS

FIN

AN

CIA

L SE

RV

ICES

INSU

RA

NC

E M

AR

KET

OTHER

Counter-party risk

Settlement risk Credit risk

Liquidity risk

RiskGovernance

Operational Risk

Person to Personmoney transfer

Remittance Interbank Payment

Financial Inclusion

Cross-border payments

Interbank Clearing

Distributed Data storage

KYC AML

Crowd FundingMarket placeE-Identity

Asset Transfer Clearing & Settlement

Reconciliation

Reg Reporting Audit & Compliance

Trade Surveillance

RegulatoryFraud prevention

Agency Sales

WC engagement

Data consistency

Factoring

Device data integration

Health info reconciliation

Claims Payout

---

Legal e.g., Inheritance

TitleProtection

Proof of Ownership

Collateral Management

PatientsHealth Record

Publishing Diamonds,Gold

Non-Financial Asset Transfer

Cyber-security

Real-time asset tracking

BLOCKCHAIN APPLICATIONS

What issues can the Blockchain technology solve for the Financial Services Industry?




USE CASE DEVELOPERS,

DEVELOPMENT PLATFORMS AND

APIs

PLAYBOX PROVIDERS

EXISTING ESTABLISHED FS INFRASTRUCTURE

TRADING PLATFORMS,

CAPITAL MARKETS, SETTLEMENT

CORPORATE ACTIONS

BACKED BYSMART

CONTRACTS

SMART LOANS

BANKING COMPLIANCE

(AML AND KYC)

EXCHANGES

The Blockchain Ecosystem is under construction. Both start ups and knows players are developing applications using blockchain technologies

Blockchain




Blockchain Use Cases To Consider in Financial Services

Blockchain/DLT technology has the potential to enhance Financial Services processes throughout

consumer and institutional applications

COLLATERAL MANAGEMENT

Utilizing blockchain technology collateral requirements would decrease and collateral could be moved around the system faster to meet new regulatory rules imposed after the financial crisis

SETTLEMENT AND CLEARING

On the blockchain, the entire lifecycle of a trade – including its execution, clearing and settlement – can occur at trade level, lowering post-trade latency and reducing counterparty exposures

REGULATORY REPORTING

The blockchain is fundamentally a record of transaction history, delivering a fully transparent, accessible transactional database for governing bodies

CRYPTOCURRENCIES

Cryptocurrency is expanding globally due to the benefits such as enhanced security as opposed to credit cards, more transparency in regards to its value and international use

MORTGAGES

Financial institutions will have the ability to organize all relevant documentation to a specific mortgage into the “chain” assisting banks in avoiding fines and streamlining mortgage related processes

TRADE SURVEILLANCE

Blockchain can enhance a firm’s ability to monitor trade activity across various asset classes and throughout the lifecycle of the trade

CONSUMER PAYMENT SYSTEM

Consumers will be able to feel more confident and secure making payments over electronic mediums

KNOW-YOUR-CUSTOMER

Customer identity can be stored on the blockchain, ensuring secure and rapid ID authentication without the warehousing of sensitive data at third-party repositories

INSTITUTIONAL PAYMENTS

Blockchain’s application for frictionless P2P & overseas transactions has the potential to reduce risk, transaction costs and to improve speed, efficiency and transparency

EXCHANGES

Blockchain has the potential to simplify the process of tracking ownership and accelerating the transfer of assets

DIGITAL IDENTITIES

Blockchain technology can enhance the security of digital identities

RECONCILIATION

Manual reconciliation becomes redundant as a result of blockchain technology

SMART CONTRACTS

Blockchain allows the use of smart contracts which will significantly increase the efficiency of various markets

PRIVATELY HELD SHARES

Blockchain allows for the automation of tracking private shares

SYNDICATED LOANS

Reduce back office processing time and expenses of syndicated loan transactions

CROSS CURRENCY PAYMENTS

Blockchain allows counterparties seamlessly track ownership of cross currency transactions

TRADE FINANCE

Enhance trade finance by speeding up banking transactions, while cutting costs and boosting transparency”

INSURANCE

Records can be stored in a decentralized manner reducing friction and costs throughout organizations

CONSUMER INSTITUTIONAL




Blockchain Use Case Sample –Recordkeeping

Register transfer of electronic

records selected for preservation

Verify that the transfer is authorized

Examine electronic records

Retrieve digital component about

a preserved record

Package and present reproducible electronic record using requested presentation method

Update/restore record

Update / Restore record?

Registered Transfer

Conforming Transfer

Preservable Records

Send notification to the submitter

Accessioned electronic records

Yes

No

Reproduced Electronic Record and Certificate of

Authenticity

Send Request to reproduce a

record

Transaction Execution

Transaction Record to be Archived

(Transaction notional, Counterparty details, Product

info, risk impact, etc.)

Blockchain Distributed Database

(Metadata)

• Will conclusively prove that a particular record existed at a specific point in time by allowing the agreement to be rapidly and permanently recorded without resorting to a third party to document it on the bank's behalf in a transparent, responsive and irrefutable manner

• Will dramatically reduce the cost of governing compliance (eg: regulatory) as each new version of a document can be denoted to have changed according to a defined set of rules

• A smart contract can encapsulates data-driven rules. When the conditions laid down by these rules are met, the smart contract will execute the rules – for example: Reproducing a regulatory report in requested format by the regulator without banks acting as middlemen

Regulatory Reporting

Taxation

Benchmarking

Bookkeeping

Balance Sheets

Income Stmts.

Cash Flows

Transactions

AML, KYC records




Blockchain Use Case Sample –Claims Management

• All claims on a particular Auto would be rapidly recorded both on the private and public claims blockchain that is transparent and immutable. Duplicate claims on the same auto (both within the insurer and across insurers) cannot be filed as its being checked across the both the private and public ledgers.

• Will dramatically reduce the cost of governing compliance (eg: regulatory) as each new version of a document can be denoted to have changed according to a defined set of rules

• A smart contract can encapsulates data-driven rules. When the conditions laid down by these rules are met, the smart contract will execute the rules – for example in this case claims are filed and adjudicated using the coverage information recorded on the smart contracts thereby avoiding disputes regarding what coverage existed during what specific period of time and without claims adjusters reviewing this information. Claim payments can also be potentially automated via smart contracts

Verify Insured’s identity

Record the claim record onto the

blockchain

Claim record with status recorded onto the private blockchain and published

onto the public blockchain

Process claim payments via smart

contract information

Send notification to the submitter

Network examines the record against the Blockchain for

duplicates

No

Record can be retrieved by the network from the

blockchain when needed for reporting purposes

Claims Adjudication process using

Smart Contracts

Insured files a claim (online claims

system)

Examine record for any missing claim information

Public Claims Blockchain Distributed Database

Insurer’s Private Claims Blockchain

Distributed Database

Duplicate?Notify submitter that the claim

cannot be recorded

Coverage Exists?

Notify submitter that the claim is

denied and record status on

blockchain

No

Yes

Yes




POSSIBLE CONSENSUS PROTOCOL FLAWS

UNPROVEN TECHNOLOGY WITH UNTESTED CAPACITY

LOW TRANSACTION SPEED MAY IMPACT SCALABILITY AS THE TECHNOLOGY INTRODUCES DELAYS

UNCERTAIN REGULATORY STATUS

REQUIRES SIGNIFICANT DISK SPACE

SECURITY, 51% ATTACK

RESPECTING CLIENTS’ PRIVACY

COST BENEFITS OF REPLACING EXISTING IT LANDSCAPE

DAO collapse - Hacker exploits caused losses of $ 60 mi and triggered the Etherum hard-fork

The adoption of Blockchain technology faces Risks and Challenges




Source: Radar Fintechlab June 2016

With more than 200 Fintech Co’sin Brazil

Are they a true threat?

Will they be?




The Digital Strategy toolset is evolving

CROWDSOURCING

UX DIFFERENTIATIONOPEN INNOVATION

DISTRIBUTION PARTNERSHIPS

MINIMUM VIABLE OFFER

ADVISOR MOBILITY MOBILE FIRST DESIGN

SOCIAL CUSTOMER SERVICE

MOBILE-AUGMENTED PRODUCTS & SERVICES

DIGITAL CUSTOMER SERVICE

SOCIAL COMPARISON GAMIFICATION RICH PERSONALIZATION BEHAVIOURAL SECURITY

SECURE PAYMENTS




The Appropriate Responses from FS Regulators

Encourage innovation while protecting consumers and the integrity of the FS system

FCA in UK – Digital sandbox free of most regulatory reprisals PSD2 in Europe to open up banking systems through APIs Don’t require firms offering only niche FS service to have to become a registered ‘Bank’

with all the regulatory oversight and bureaucracy that entails Scans to ensure regulations are not unnecessarily impeding emerging technology Encourage Insurance to move business from Protection to Prevention in the larger-scale interests of consumers Try to avoid regulations that favor one part of the FS eco-system over another Provide clarity over regulations, avoiding ambiguity Try to accommodate new approaches within existing frameworks, avoiding overly prescriptive rules

Consider social obligations

Digital disruption should NOT result in the exclusion, marginalization or higher fees for less technical-savvy consumers, vulnerable citizens or people who face cost/location challenges to access digital channels

Keep focus on larger goals

Economic growth and prosperity in a competitive world Poverty reduction and increased financial inclusion Continuing relevance and competitiveness of local FS sector (avoiding technology obsolescence) Real cost savings for consumers through digital innovation (World Bank estimates technology innovation in global

banking has already saved consumers >US$60b since 2010)

Adopt cultural change just as the FS sector is doing

Be more informal, approachable, consultative, flexible and collaborative (MAS staff wearing black T-shirts) Engage with all the participants in the FS ecosystem, including Startups, Incubators, Accelerators, Investors Be faster to respond to provide guidance on emerging areas (even after 10+ years, cloud regulations are a mess

across Asia/Pacific for the FS sector)

Investigate FS technology innovations at early stages, especially Blockchains/DLTs and Regulatory Tech

Become familiar with emerging tech for FS during as early stages as possible Use Government purchasing power to use FS tech Ultimately, the role of regulators may be considerably reduced in a self-policing, transparent, social sharing,

blockchain/DLT-using FS world




Most regulators are supportive, but have not formally finalized rules

New York Reveals BitLicense

Framework for Bitcoin Businesses

The New York Department of Financial

Services (NYDFS) has released its long-

anticipated list of proposed rules and

regulations that will be required for New

York-based bitcoin businesses.

US Securities Exchange Commission

The SEC has reportedly approved Overstock's plans to issue stock via the

blockchain through its subsidiary platform. According to Wired, the

company was granted an amended Form S-3 – a requirement solely for

companies that report under the Securities Exchange Act of 1934 – meaning

that it could now issue public securities leveraging blockchain technology.

I don’t know who to even call,” said Charlie Cooper, managing director at R3 CEV

To illustrate the challenges, Cooper pointed to the question of “settlement finality” in financial transactions, and how agencies

differ in terms of how they define the concept. For example, both the Securities Exchange Commission and Commodity Futures

Trading Commission have different rules on what constitutes final settlement of transactions.

Blockchain is ‘no panacea’, says UK regulator

lockchain, the technology behind the bitcoin virtual

currency that is now widely touted as a transformational

technology for the financial services industry, may not be

“the panacea of all ills” in the sector, according to the

UK’s industry regulator, which says that it has “yet to

take a stance until its application is clearer”.

CFTC Ruling Defines Bitcoin / Digital Currencies as Commodities

The US Commodity Futures Trading Commission (CFTC) has issued its first

action against an unregistered bitcoin options trading platform, ordering the

startup to cease operations and simultaneously settling the case.




How Brazilian banks and regulators are responding

Bradesco, the Largest retail bank in Brazil

Started a incubator project for Fintech Startups, the InovaBra, with more than 500 applications and 10 selected projects.

Through its incubator, Bradesco is supporting Ewally, a payment plataform in blockchain aimed at social inclusion. A pilot program is scheduled for end of 2016 in one of São Paulo’s poorest communities;

Started negotiation with the Ripple Labs, the main reference in international remittance with blockchain; Joined the R3, Blockchain Consortium, in June 2016; Bradesco Next: the bank opened a futuristic hi-tech branch in São Paulo Brazil featuring robot guides, personalized

financial advisory services from digital avatars and on-screen consultants, biometric interfaces, and wall- and table-mounted gesture-controlled touchscreens;

Developing a fully digital bank, expected to launch before the end of 2016. The new bank focuses on the customer experience and the segmentation of the client base by income and behavior for mass customization with the use of Big Data analytics.

Started remittance tests with the Startup BitOne systems.

Itaú, Largest financial institution in Brazil

Joined the R3, blockchain Consortium, in April 2016; Started the Cube, a coworking and innovation program with more than 55 participants by July 2016; Started the “Boleto Simples” (Simple payment slip) program in 2011, opening a API to the Fintech market;

Other Banks “Original” bank launched the first 100% digital banking platform in Latan America. It allows account opening and its full range of services to be operated from smartphones.

Banco Santander and HSBC entered the R3 - Consortium blokchain.

For the Brazilian Central Bank (Bacen) the Fintech regulation is still challenging.

In 2013 a regulatory milestone allowed companies to operate payment transactions without the intermediation of a financial institution. The operators must keep a “payments account” for each customer. (MP 615/13 e da Lei 12.865/13)

Forum of Financial Citizenship in December 2015 included the participation of 10 Fintech companies that presented their work to the consumers, including “Acesso” with its 200,000 prepaid cards and StartMeUp, a equity crowdfunding plataform.

Since 2011 banks are allowed to offer fully electronic checking accounts to customers. In 2016 the account opening process itself was allowed to be perform through digital tools.

Until 2016 the Bitcoin is not authorized to be used as currency in Brazil, but the Central bank and the Banking Federation are leading discussions on the use and regulation of blockchain and e-currencies.

© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are

affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG

International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member

firm. All rights reserved.

The KPMG name, logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is

received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a

thorough examination of the particular situation.

Documents

Digital Transformation in Financial Services - Financial ...felaban.s3-website-us-west-2.amazonaws.com/... · In 2016 a big bank also doubles as an enterprise software company and