Leveraging technology through turbulent times

As mentioned yesterday, I should be in Bahrain this week chairing the MEFTEC conference. As the chap in charge, the organisers asked me to write a welcome note and so, in the spirit of Imagineering that we’re there, here’s my note for this year:

Welcome to MEFTEC 2010, the sixth year that Bahrain has hosted the Middle East’s largest financial technology conference and exhibition.

This year’s conference has the theme ‘Innovation amidst regulation’ as a result of the imminent implementation of new rules and regulations across the global banking markets. The G20 summits and the never-ending announcements of rules related to liquidity and capital reserves seem to rumble regularly, and yet little has yet been implemented. This will change in 2010 through the next five years or more, as the US Federal Reserve and UK Treasury work closely with the Finance Ministers of all countries to agree the correct approach for future operations.

South Asia, Middle East and Africa – the SAMEA Region – has clearly been affected by this crisis with the visible default on the Dubai’s debt in November, just as the Burj Khalifa opened. Less visible has been the stress on SAMEA banks, with many smaller banks suffering from Non-Performing Loans (NPLs). Ratings agency Standard & Poor has said it believes that 2010 will be another difficult year for Gulf-based banks, for example, due to the issues in cleaning up the loan books. In their most recent figures, about one-third of S&P’s ratings on banks in the GCC have a negative outlook.

"We see a growing disparity in credit quality among banks in the Gulf, between the stronger Saudi and Qatari banks on the one hand and the relatively weaker Dubai, Kuwaiti, and Bahraini investment banks on the other," said S&P credit analyst Mohamed Damak.

Even with Saudi banks being viewed as having strength, it is only the larger Saudi banks. For example, the Kingdom announced in February that the global financial slowdown and the ensuing local debt default crisis have exposed the vulnerability of small and medium banks in Saudi Arabia, as they have chopped off a large chunk of their funds for bad loan provisions.

The result is that NPL to total loans ratios doubled between 2008 and 2009, reaching 5.4% on average by September 30th 2009 compared with 2.7% at year-end 2008.

This change in focus means that SAMEA banks, like Western banks, are cutting back on loans and risk, and gearing towards the new macroprudential supervisory structures the G20 are developing for global management of financial markets. These macroprudential supervisory structures demand change in five areas:

• Liquidity Management
• Bank Corporate Governance structures
• Capital Adequacy Reserves
• Risk Management
• Procyclicality measures

And all of these will have impacts on internal systems and controls. For example, real-time risk management, liquidity management and counterparty positioning will be a clear focal point for next generation systems developments. Equally the whole nature of trade and liquidity reporting, requiring ever increasing levels of bank transparency in processes, will be a key focus.

Alongside all of these regulatory developments are innovations of course, such as the distribution and delivery technologies focused around mobile telephones and particularly the iPhone.

Therefore, in setting the theme of this year’s MEFTEC around “innovation amidst regulation”, there are a number of technologies that we see as key to addressing the regulatory and innovatory requirements of the 2010s.

Specifically, there are four technology areas we have handpicked for focus, namely:

• Mobile Services
• Social Media
• Cloud Computing
• Low Latency

These four technology buckets play a critical role in all aspects of society and banking. This is not the say that the list is exhaustive – video, biometrics, security and fraud systems and more are all just as critical. Just that these four are top of mind for 2010.

Equally, this does not reflect the business imperatives around risk management and reporting, Islamic banking, microfinance and remittances, infrastructural change for payments processing and more. But that these technologies can provide support and address the needs for change in these business imperatives.

A brief review of each of these technology areas shows the impact they are having on these business needs.

Mobile Services

When M-PESA launched in Kenya, it transformed a country from zero infrastructure for monetary movements to a wirelessly connected country that now had instantaneous and cheap payments processing. The results have been transformational. Before the mobile remittance service launched, Kenyans could only move monies from Nairobi to the remote villages by paying a driver to physically transport the cash. That was expensive and fraught with dangers of theft and loss. The M-PESA service launched in 2007, in a partnership between Safaricom (a division of Vodafone) and the government. Within a year the service had 1.5 million users and today has eight million. 10% of Kenya’s GDP moves through the mobile remittance service and it makes Vodafone’s Safaricom the largest bank in Kenya.

That’s transformational.

Equally transformational has been the iPhone, where the apps have created a massive new market for microtransactions. The iTunes store saw over a billion downloads across 100,000 apps within nine months of launch, and today has exceeded four billion downloads. These downloads cover everything from entertainment to news, flight times to buying and selling stocks and shares. The result is that a bank is clearly now in people’s hands 24*7 and the phone itself is more important as a lifestyle accessory today than a watch or a wallet.

That’s transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

Social Media

In the last five years, along with the mobile transformation, there has been a revolution in communications via technology. The social revolution. This social revolution is reflected in key developments demonstrated by the massive societal move to use Facebook, and its localised equivalents. Facebook has over 400 million users. It is the largest communication, entertainment, news and discussion channel on the planet. It has more influence with more people than their teachers, bankers, politicians and business leaders.

That’s transformational.

Alongside the march of Facebook has been the correlated developments of Twitter. Viewed by many as a transient phenomena, the reason why Twitter hit the news is that it provides the news, in real-time. The typical users of Twitter are actually over 35-yeras of age, and they use it to keep up with the BBC, Al-Jazeera, CNN and other news services, as well as the most influential voices in their business and social communities. The fact that Twitter allowed the world to be informed of the Haitian Earthquake, the G20 protests and the Iranian revolts in real-time demonstrated the power of connections to any individual on the planet in real-time globally.

That’s transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

Cloud Computing

For many years, banks have been seeking to maximise the efficiency of operations by leveraging compute power. In the 1970s, the compute power was expensive and much of it required bespoke in-house developments. During the 1980s, it became distributed and more specialised applications could be deployed. The 1990s saw the advent of large-scale client-server systems and the origins of today’s outsourced structures. Throughout the 2000s, outsourcing became more complex with nearshore and offshore management structures and the idea of compute power now being a complicated soup of internal and external resourcing.

Cloud computing merely takes this towards a logical conclusion and, as some folks refer to it, makes the original mainframe in-house service an outhouse service. What they mean by this is that you can now plug into massively scalable compute power with your own applications on a pay-as-you-go basis. You have the control of the mainframe structure, but with the flexibility of usage that is purely based upon compute power being used when and as you need it.

That’s transformational.

It moves capital expenditure for computing off the table, as it’s now just operational expenditure on a variable cost basis,

That’s truly transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

Low Latency

During the past few years, the world’s investment markets have revolutionised thanks to algorithmic trading. But it didn’t stop there. Algo trading moved into high frequency trading, and the result has been a massive focus on speeds and feeds and the need for minimal latency, or delays, in the way trades are processed and executed.

This low latency focus led to a battle over speed between execution venues and stock exchanges, with BATS in the USA stealing a march on NYSE and NASDAQ whilst Chi-X in Europe beat the living daylights out of the London Stock Exchange, Deutsche Bourse and NYSE Euronext.

Now all is dark pools, high frequency trading based upon nanoseconds of processing. And if you’re not in the front nanosecond, then you’re dead meat.

That’s transformational.

But it goes way beyond processing trades on city servers to financial markets general. For example, recent legislation in some countries dictate that processing payments must take place in real-time. Elsewhere, risk management reporting and liquidity management positioning must be delivered in real-time. In fact, financial services per se – from consumer’s self-servicing online to corporate cash management positions to treasury management overall – are all changing from batch to real-time.

That’s transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?