FinXTech Annual Summit: Exploring the Power of Collaboration


fintech-5-9-18.pngBanks are increasingly becoming technology companies—not in the eyes of investors, perhaps—but certainly in terms of meeting the expectations of their customers in a rapidly digitizing consumer marketplace. Banks have been heavy users of technology for decades, but the role of technology in virtually every corner of the bank, from operations to distribution, to product design, lending and compliance, is taking on a greater strategic importance.

It was only a few years ago that an emerging fintech sector was viewed by many bankers as a competitive threat, particularly marketplace lenders like Lending Club and SoFi, or new payments options offered by the likes of Apple Pay and Venmo, PayPal’s successful P2P product. While those competitive threats still exist, the focus of most banks today is working with fintech companies in collaborative relationships that benefit both sides. Banks are facing enormous pressure from changing consumer demographics and preferences to develop new products and services that go well beyond what they have traditionally created on their own. The new ideas include more than just new applications that enhance or expand an institution’s mobile banking capability, an area that continues to receive a lot attention. With developments in artificial intelligence (AI) and machine learning, banks are able to bring greater efficiencies and effectiveness to such disparate activities as regulatory compliance and accounts payable.

There are challenges to a partnership approach, however, beginning with the necessity to fully vet the potential fintech partner in a thorough due diligence process. Banks are conservative by nature, while many of the fintech companies developing the systems and applications that enable banks to stay abreast of the rapidly evolving digital economy are quite young and culturally different. Banks that want to work with fintech companies will have to do the necessary due diligence while also bridging the culture gap.

The benefits, and challenges, of working collaboratively with fintech companies will be the focus of Bank Director’s FinXTech Annual Summit, which will take place May 10-11 at The Phoenician resort in Scottsdale, Arizona. The agenda kicks off with back-to-back peer exchange discussions on the dynamics of fintech partnerships and changes in consumer behavior, then provides both general session presentations and case study sessions that examine such topics as innovation, AI, automation in commercial lending, vendor contract management, the digital robotic workforce and the future of the branch in an increasingly digitized world.

Also occurring at the Summit will be the announcement of Bank Director’s 2018 Best of FinXTech Awards, which will be given to banks and their fintech partners for projects where they worked together in a collaborative relationship. From a list 10 finalists, awards will be given a bank and its fintech partner in each of the following award categories: Startup Innovation, Innovative Solution of the Year and Best of FinXTech Partnership.

Why Improving the Customer Experience is the Latest Industry Trend


technology-5-9-18.pngPerhaps you’ve noticed a driving theme across the financial services industry to innovate and improve the customer experience. While the path to achieving the goal varies greatly—from using artificial intelligence to personalize the experience to implementing a single platform—winning the experience and efficiency game comes down to one simple mission: create an enjoyable customer experience.

Everyone watched as this transformation, led by user experience, disrupted industries like e-commerce and entertainment. Companies like Amazon and Netflix have been ahead of the curve in delivering superior experiences to their customers, which often has not just been because they offer a great user experience, but also because of logistical excellence. Today, offering a personalized experience and real-time services across any device is the new normal.

In fact, recent data confirms this expectation even in financial services, according to Barlow Research Associates Inc. Customers cite that a primary driver for working with a bank is often based on how easy the bank is to do business with. Furthermore, customers expect the same seamless and easy-to-use digital interaction with their bank as they do while ordering an Uber, for instance.

The Single Platform Difference
With the rise of financial technology (fintech), there is no shortage of vendors providing an assortment of solutions to help financial institutions offer an improved customer experience. Unfortunately, some banks and credit unions have found themselves with more headaches than enhancements when multiple vendor solutions are implemented across the institution.

Disparate systems often lead to data siloes, expensive integration projects and increased overhead in due diligence and security monitoring. The seamless, multi-channel experience customers want is thrown out the window when multiple, separate systems are implemented and expected to work together, and rarely do.

A single-platform solution has become a strategic imperative to overcome many of the issues associated with disparate systems. With one system managing all channels, banks and credit unions can deliver a unified experience while reducing operational inefficiencies. This is a clear need as more than half of financial institutions customers don’t believe that the digital channel of a bank can service all their needs, recent research data shows.

However, transforming the customer experience doesn’t just mean introducing a slick user interface; back-office processes must also be efficient and meet the real-time demands of customers. There is almost a 50 percent abandonment rate of banking customers starting a process online and then finishing at a branch, according to the 2017 Account Opening and Onboarding Benchmarking Study. This is likely due to another fact: less than 20 percent of financial institutions have implemented an end-to-end process to date.

Streamlining customer and employee interactions within a financial institution to drive increased efficiency, transparency, profitability and regulatory compliance across all lines of business is essential in order to drive a superior customer experience. Regardless of the originating channel, a customer should receive:

  • Transparency into banking processes
  • Convenient access to status updates and document sharing
  • Personalized, seamless customer experience
  • Digital/mobile-enabled access

Where to Begin
Consider these three areas for ensuring a successful transformation.

  1. Plan the journey before you begin. In order to establish a vision to guide the entire organization (or even a line of business), it’s imperative to first understand the journey customers go through when interacting with the institution. This involves considering customers’ emotions, and the cause for those emotions. Dig into these areas while exploring the customer journey to improve the experience.
  2. Pick one product or line of business and take it end-to-end. Many institutions, while taking the correct path of not just implementing a slick user interface, end up trying to take on more digital transformation than they are ready for. Instead of trying to transform the whole bank or department all at once, greater success is often met by starting with a single product, like a secured small business loan, and transforming that experience end-to-end.
  3. Finally, release then iterate. Starting with a single product or a particular line of business provides the opportunity to test and perfect. The iterative process is important not just to improving the customer experience, but also to ensuring that any needed operating model adjustments can be properly vetted.

As technology giants like Amazon continue to push the bounds of customer expectations, it can at times feel daunting to try to make these shifts at your own institution. However, as customer demands for seamless digital experiences grow and become even more a part of the buying decision, the emphasis on a single platform to help deliver both an exceptional experience and logistical excellence is even more pronounced. This growing demand marks the importance and urgency of employing a strategy that focuses on delivering a delightful customer experience from the first interaction all the way to the back office.

What Facebook’s Data Debacle Could Mean for Banking


regulation-5-2-18.pngThere was a particular moment on the second day of his most recent testimony Facebook CEO Mark Zuckerberg struck a rare smile.

Zuckerberg, on Capitol Hill to answer pointed questions about the scraping of company’s data on 87 million of its users by U.K.-based Cambridge Analytica—was asked if Facebook was a financial institution.

The odd inquiry came during a string of questions from Rep. Greg Walden, the Oregon Republican who chairs the House Energy and Commerce Committee that grilled Zuckerberg about the massive company’s complex web of operations, which includes a mechanism for users to make payments to each other using popular apps familiar to bankers like PayPal and Venmo, as well as debit cards.

Facebook is not a financial institution in the traditional sense, of course, but it does have a clear position in the financial services space, even if just by its role in providing a platform for various payment options. It has not disclosed how much has been transferred between its 2 billion users, and it certainly has raised questions about how tech companies—especially those with a much narrower focus on financial technology, or fintech—collect, aggregate, use and share data of its platform’s users.

This relationship could soon change as Washington lawmakers discuss possible legislation that would place a regulatory framework around how data is collected. Virtually any industry today is dependent on customer data to market itself and personalize the customer experience, which is predominantly on mobile devices, with fewer personal interactions.

“I think it’s likely something is going to happen here, because we’ve kind of been behind the curve as it relates to [regulation], especially Western Europe,” says David Wallace, global financial services marketing manager at SAS, a global consulting and analytics firm.

While banks are somewhat like doctors and hospitals in the level of trust that consumers historically have had with them, that confidence is finite, Wallace says.

Survey data from SAS released in March shows consumers want their banks to use data to protect them from fraud and identity theft, but they aren’t crazy about getting sales pitches.

At the same time, payments services like Paypal’s Venmo and Zelle, a competing service that was developed by a consortium of banks, also collect data, but have a lower “score” with consumers in trust, according to Wallace.

Where’s the Rub?
The question from Walden barely registered on the national news radar, but it also highlights new areas of concern as banks begin to adopt emerging technologies like artificial intelligence, and market new products that are often driven by the same kind of data that Facebook collects.

The recent SAS survey also asked respondents about their interactions with banks, and how AI might influence those. Most of the survey respondents say they are generally comfortable with their bank collecting their personal data, but primarily in the context of fraud and identity theft protections. Sixty-nine percent of the respondents say they don’t want banks looking into their credit history to pitch products like credit cards and home mortgages.

As the Cambridge Analytica situation demonstrates, there is a fine balance that must be observed giving all companies the opportunity and space to succeed in an increasingly digital environment while protecting consumers from the misuse of their personal data.

Congress tends to be a hammer that treats every problem like a nail—so don’t be surprised if the use of customer data is eventually regulated. Thus far, the only regulatory framework in existence that’s been suggested as a model of what might be established in the U.S. is the GDPR, or General Data Protection Regulation, currently rolling out in Europe. It essentially requires users to opt-in to allowing their data to be shared with individual apps or companies, and is being phased in across the EU.

How that approach might be applied to U.S. banks, and what the impact might be, is still unclear. It could boil down to a “creepy or cool” factor, says Lisa Loftis, a customer intelligence consultant with SAS.

“If you provide your (health) info to a provider or pharmacy, and they use that information to determine positive outcomes for you, like treatments or new meds you might want to try, that might factor into the cool stage,” Loftis explains.

If you walk by a bank branch, whether you go in it or not, [and] you get a message popping up on your phone suggesting that you consider a certain product or come in to talk to someone about your investments without signing up for it, that’s creepy,” she adds.

Any regulation would likely affect banks in some way, but it could be again viewed as a hammer, especially for those fintech firms who currently have a generally regulation-free workspace as compared to their bank counterparts.

Bank Director’s Bank Compensation & Talent Conference to Highlight Culture


culture-10-23-17.pngCorporate culture will be on center stage at Bank Director’s 2017 Bank Compensation & Talent Conference, which begins on Monday, October 23, at The Ritz-Carlton Amelia Island in Florida with peer exchanges and a workshop. On Tuesday and Wednesday, October 24-25, the main conference takes place with presentations on incentive compensation, leadership development, business strategy and insights from bank CEOs and directors.

Culture is an important but under-examined topic in banking because of the connection between the culture of a company and its financial performance and regulatory compliance track record. To understand that, look no further than the fraudulent account opening scandal at Wells Fargo & Co. This was clearly a cultural issue, where a large number of people in the retail bank were willing to break the law just to elevate their own compensation, or keep their jobs.

The opening general session on Tuesday, “Culture Eats Compensation for Breakfast,” will examine the importance of culture in a bank’s performance, and how its compensation philosophy and practices can reinforce culture. A second general session on Tuesday, “Creating a Company That Scales,” will look at how bank management teams with experience acquiring other banks are able to take the cultures of two banks and successfully integrate them to get the full value of the acquisition.

One of the most important responsibilities of the board is to make sure the bank is doing a good job of managing its talent, from the CEO’s office down to middle management. A session titled “The Board’s Role in Leadership Development” will review some best practices for bringing talented people into the organization and then making sure they have an opportunity to grow and expand. Managing the CEO succession process is especially important given the key role that individual plays in the bank.

Other general sessions scheduled on Tuesday and Wednesday include “All Business Models Are Not Created Equal,” will look at how three factors—the increased use of technology, the continued popularity of online and mobile channels, and the changing demographics of banking’s customer base—are impacting the talent selection process. The impact that disruptive market forces like financial technology is having on how banks interact and attract customers and recruit talent will be explored Wednesday in the general session titled “Managing Disruption & Compensating for Innovation.”

Banking Blockchain: Making Virtual Currencies a Reality for Your Bank


blockchain-10-17-17.pngBlockchain-based virtual currencies are gaining in popularity and evolving quickly. Blockchain currencies often are described as disruptive, but also have the potential to radically revolutionize the banking industry in a positive manner. The reality is that blockchain currencies may develop into a useful tool for banks. Their acceptance, however, is hindered by their own innovative nature as regulators attempt to keep pace with the technological developments. Potential blockchain currency users struggle to understand their utility. Despite these hurdles, many banks are embracing opportunities to further develop blockchain currencies to make them work for their customers.

What Are Virtual Currencies and Blockchain?
Virtual currencies, also referred to as “digital currencies,” are generally described as a digital, unregulated form of money accepted by a community of users. Currently, blockchain currencies are not centrally regulated in the United States. For example, the federal government’s Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission view blockchain currencies as money, the Commodities Futures Trading Commission sees them as a commodity, and the Internal Revenue Service calls them property. The IRS has attempted to define virtual currency as:

a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value [and] does not have legal tender status in any jurisdiction.

FinCEN, the agency with the most developed guidance regarding virtual currency, regards it in a more practical fashion as a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. Whatever the regulatory definition, virtual currencies need more certainty in form and function before their use becomes commonplace.

Blockchain technology brings benefits to payment systems and other transactions that are quite revolutionary. Blockchain technology is essentially a decentralized virtual ledger (aka, distributed ledger), utilizing a comprehensive set of algorithms that records virtual currencies chronologically and publicly.

Some examples of blockchain currencies currently in use are Bitcoin, Dash, Ether, Litecoin and Ripple. These currencies are constantly evolving and are being developed by individuals, technology-based peer groups or financial institutions. In August 2016, a consortium of banks, led by UBS, Deutsche Bank, Santander and BNY Mellon, announced the development of the “utility settlement coin” or USC. The USC is meant to allow banks to transact payments in real time without the use of an intermediary. It is expected to go live in 2018.

Blockchain Currency Opportunities for Banks
Despite their reputation for being tools of illicit trade, blockchain currencies may be useful to banks in a variety of ways and can achieve certain benefits. Blockchain currencies could:

  • actually reduce fraud, including hacking or theft attempts, because the technology makes every step of the blockchain transparent.
  • reduce costs and risks associated with know-your-customer (KYC) programs because blockchain has the ability to store KYC information.
  • allow a financial institution to establish a new trading platform for exchange that eliminates intermediaries.
  • potentially could transform the payments industry. An obvious example is the USC, which permits payments to be made in real time, without the use of intermediaries; and strengthens the confidence in the authenticity of the transaction. Banks that are either able to establish a blockchain currency or adapt a proven technology for their operations will generate operational efficiencies and obtain a significant competitive advantage.

What Are the Regulatory Challenges?
Blockchain currencies currently are not centrally regulated in the United States. As discussed above, the lack of a uniform definition is a fundamental issue. FinCEN has classified any person or entity involved in the transfer of blockchain currencies as a money transmitter under money services business regulations.

As blockchain currencies continue to evolve, however, additional federal laws and regulations must be drafted to address the most substantial areas of risk. Some states are weighing in on the topic as well. For example, the Illinois Department of Financial and Professional Regulation recently issued guidance on the use of virtual currency in which the Department views virtual currency through the lens of the Illinois’ Transmitters of Money Act.

Additionally, the Uniform Law Commission is developing regulations that would, among other things, create a statutory structure (for each state that adopts it) to regulate the use of virtual currency in consumer and business transactions. Regardless whether the federal government or the states enact legislation affecting blockchain currencies, a more uniform regulatory approach would greatly aid their development and utility.

Conclusion
Blockchain currencies, and the laws and regulations governing them, are in a promising state of development. As new technologies emerge and existing technologies continue to evolve, banks are presented with real opportunities for innovation by successfully adapting blockchain for use by their customers. Those that figure it out are poised for real success.

Using Culture to Drive Innovation at Your Bank


culture-9-1-17.pngHow important is culture when it comes to changing a company’s approach to innovation and technology? Bank Director’s 2017 Technology Survey found that few bank executives and directors believe that their bank’s culture has more in common with a technology company than a traditional bank. But that doesn’t mean that cultural elements don’t play a role in creating a tech-savvy bank.

People generally underestimate the importance of culture and innovating,” says Jimmy Stead, chief consumer banking officer at Frost Bank, headquartered in San Antonio, Texas, with $30 billion in assets.

Most financial institutions wouldn’t be comfortable operating like a technology company. Frost Bank doesn’t think like a technology company, says Stead, but the bank has adopted a cultural mindset along with practices that promote innovation. Other banks are changing their approach too. Here are four elements that financial institutions are embedding in their cultures to encourage innovation and technological change.

Make empathy a core cultural component.
Caring about the customer is a core value at Frost Bank. “If you’re going to truly innovate, you have to start with a problem that’s worth solving,” says Stead. To solve problems for customers, you have to know what problems are important to them. “You don’t do that by caring about innovation. You do it by caring about people,” he says. Improvement is a secondary element of this corporate mindset, and employees are encouraged and empowered to identify and solve customer pain points.

Require bank employees to actively use financial technology.
In his “Advice for New Bank Directors,” Bank Director Editor in Chief Jack Milligan encourages board members to use financial technology, including the bank’s mobile app and competing products such as Venmo, the person-to-person (P2P) payments app owned by PayPal. It’s sound advice that extends to bank staff as well.

When Central National Bank, in Waco, Texas, with $820 million in assets, first introduced mobile banking, Chief Information Officer Rusty Haferkamp says that employees struggled to become familiar with the technology and, by extension, support customers. Later, the bank required that staff use the P2P payments function within the bank’s mobile app, and employees are better equipped to help customers. Training staff on the latest technology is an ongoing process as new solutions continue to evolve.

Encourage collaboration and partnerships.
Teamwork drives innovation at Frost Bank. “We’re fostering an environment of giving people the space to experiment some, and breaking down barriers so that they can work closely and be intensely focused on our customer,” says Stead. An open and collaborative environment helps Frost attract talent that has the technical know-how, he adds.

Relationships with the right technology vendors can drive innovation and also provide another layer of expertise. “I’ve tried through technology to help position the bank, knowing that we can’t develop it internally,” says Chip Register, chief administrative officer and CIO at Fauquier Bankshares, which has $646 million in assets in Warrenton, Virginia. Partnerships can enable this development.

Foster and reward innovative ideas.
San Antonio-based USAA, the diversified financial services parent of $81 billion asset USAA Federal Savings Bank, relies on an array of programs, including competitions, to encourage employees to come up with innovative ideas. Ninety-four percent of USAA employees participated in USAA’s innovation programs in 2016, with USAA implementing more than 1,000 employee ideas, says Lea Sims, assistant vice president of USAA Labs, which she discusses in further detail in Bank Director digital magazine’s May issue.

Frost Bank hosts an annual hackathon, a week-long event where employees collaborate on and develop technology solutions. Experimentation is encouraged—the winning team had two failed ideas before hitting on a winner—and each team has to communicate with customers about their concept. Some of these ideas are put to use at the bank. But that’s not the only goal of the event. “We want to make sure we’re giving smart people a chance to just work on something they’re passionate about,” says Stead.

Department managers at $444 million asset Franklin Savings Bank in Franklin, New Hampshire, are expected to identify efficiencies or areas for improvement in the customer experience, says Cheri Caruso, the bank’s CIO. These goals are part of each manager’s quarterly review, and these managers in turn engage their departments to uncover ideas and implement solutions.

Support for technology comes from the top. “We’re very fortunate that our board is very technology-focused,” says Caruso. She says new employees are often surprised by how much technology is in use at the bank, given its size. “It all comes from the top with the board supporting this,” she says.

The Blockchain Players: Understanding the Current Environment


blockchain-8-23-17.pngFinXTech Advisor Christa Steele has created a four part series to educate our community about how blockchain is changing the transaction of digital information, its implications and the players who are shaping this technology. Below is the final part in this series.

Part One
Part Two
Part Three

Banks may be slow to adopt blockchain in the long run but commercial clients may force their hand. Companies that use blockchain such as ConsenSys, Linux Foundation, Hyperledger, and R3 aren’t just working with banks. Kaiser Permanente, Toyota, Cargill, Amazon, and several state, local and foreign governments, among others, are looking to implement blockchain technology as well. The list of prospective commercial clients continues to grow daily.

Why Community Banks Must Pay Attention
It’s too soon for a community bank to dedicate precious and limited resources to blockchain beyond just staying educated. Blockchain, also known as digital ledger technology, will no doubt be led by and developed by the larger financial institutions and regulatory bodies. I believe a community bank’s first interaction with the technology will come from interactions through their correspondent banks in excess of $50 billion in assets or larger commercial clients with robust treasury management requirements.

Blockchain is potentially so transformative, banks are likely to see changes in how banking infrastructure works today in the areas of payments clearing and settlement; digital currencies; capital markets, including securities clearing, settlement and custody; digital identification; supply chain management and regulatory compliance.

Current Regulatory Vibe in the U.S. and Abroad
It is safe to say that blockchain technology is becoming mainstream. The Securities and Exchange Commission, Internal Revenue Service and several other regulatory and governing bodies acknowledge the technology and have adopted policy language surrounding blockchain, digital ledger technology and virtual currencies over the course of the last 12 months. The most notable foreign government to announce its acceptance of blockchain is Dubai which aims to be a “city built on blockchain.”

Have You Opened a Digital Wallet?
Though I am focused on the underlying blockchain technology instead of digital currency adoption, I do encourage you to understand how the digital wallet works. It will be increasingly important in the coming months and years as these consumer digital wallets become mainstream. Xapo offers an easy-to-use and secure bitcoin wallet. I found Xapo’s account opening process to be seamless and easy to use.

Resources for Staying up to Speed
I remain convinced our industry will continue to be disrupted by improvements in technology. Technology enhancements are moving faster today than ever before. We can thank IBM and others for leading this technology charge. As you look to stay educated, great resources to consider include a membership with the Digital Chamber of Commerce and Linux Foundation. For more information, you can also check out CoinDesk, a blockchain news source.

How to Get Private Equity Out of the Dark Ages

private-equity.png

Alternative investments are on a tear, and no asset class has seen more growth than private equity. According to a recent study by eVestment, assets under administration grew 44 percent from 2015 to 2016. This influx of capital has caused major ripple effects across the entire private equity landscape, with fund managers competing intensely to attract investor capital.

This competition has reinforced the importance of the overall experience that private equity managers provide to their investors, and as a result managers have increasingly been looking to their fund administrators for solutions.

Technology is widely seen as the solution to many of the challenges facing both private equity managers and fund administrators. Yet despite this consensus, “private equity is in the dark ages when it comes to technology” as Allison Piet, director of alternative investments accounting and reporting with insurer MetLife, puts it.

Private equity fund managers and fund administrators alike are finding themselves at a crossroads on two key issues:

  1. Delivering on investor demands for greater transparency and a more modern digital experience.
  2. Handling the operational burden of labor-intensive and margin-constraining processes that are insufficient to meet growing regulatory requirements.

A study by technology provider FIS, titled “The Promise of Tomorrow: Private Equity and Technology,” brings context to these two important issues:

Delivering on investor demands for a more transparent and modern digital experience.

One of the greatest obstacles to solving this challenge is the proliferation of systems that fund administrators and fund managers use across areas like accounting, reporting and document storage.

This multi-system approach adds a great level of difficulty to the process of collecting and preparing data required to provide investors with transparency. Further, maintaining multiple systems often proves to be arduous and time-consuming.

This demand for a more modern experience has placed tremendous pressure on fund administrators in particular, as their fund manager clients increasingly look to them to meet this need. Fund managers are sending a loud message by walking away from administrators that can’t help. In fact, according to a Preqin study, 28 percent of fund managers fired their fund administrator in the past 12 months.

This helps to explain why, according to the FIS study, 26 percent of respondents felt “threatened” by technology. That said, those that are leveraging the power of technology to improve their offerings are realizing that it can become a competitive advantage, as evidenced by the 74 percent of respondents that affirmed this in the study.

A quote from the FIS study makes this key point: “The private equity industry’s effortsto reinvent its relationship with technology also reflect recognition of the critical importance of technology to winning and retaining customers and to penetrating new markets.”

Handling the operational burden of labor-intensive and margin-constraining processes that are insufficient to meet growing regulatory requirements.

The private equity and the alternative investment industries have also been going through a metamorphosis over the past few years in the area of operations, driven in large part by the imposition of ever-increasing regulatory requirements. Compliance is the great equalizer, affecting all stakeholders in the industry from the fund administrator down to the investor.

These requirements become a business-breaking burden when operational efficiency is dictated primarily by the number of people that a company has available to help tackle them. The alternative investment industry is notorious for how heavily it relies on people to handle manual and repetitive tasks that should be automated. These are things like document preparation and distribution, tracking and receiving needed approvals, sending emails for notifications and more.

These manual tasks are exponentially more troublesome when legal and regulatory requirements come into play as most fund administrators have to add one full-time employee for every three or four new clients that they win.

This results in a vicious cycle for fund administrators as they far too often expand their budgets by adding additional staff instead of investing in technology that could solve their root problems.

Technology provides the clearest path to help private equity get out of the dark ages. This is the one solution that will help all key stakeholders improve the overall offering to investors without compromising their ability to build profitable businesses.

This quote from the FIS study encapsulates it best: “Firms that embrace this world of innovative technologies are likely to be the ones that win out in the marketplace.”

How Technology-Enabled Fund Administrators Can Help Family Offices


fund-administrator.png

The unprecedented spike in the number of millionaires in the United States has led to a significant increase in family offices as people of wealth are turning to Single Family Offices (SFOs) and Multi-Family Offices (MFOs) to help them manage their wealth. Many of these family offices offer a full suite of solutions including investing, budgeting, insurance, charitable giving and tax and legal services.

As has also happened with hedge and private equity fund managers, family offices (especially MFOs) will need to turn to fund administrators for help. Because many family offices have grown to become complex and sophisticated financial firms in their own right, and they have the same needs as other private fund managers do, including:

  • Report on investment performance in a digital format.
  • Provide transparency of data to comply with regulatory requirements.
  • Deliver operational efficiencies in such areas as investor communications, document distribution and more

There were almost 11 million millionaires in the U.S. in 2016, which was the most ever recorded, and a 4 percent increase over 2015. Depending on the source, the number of SFOs in the U.S. is anywhere from 3,000 to 6,000. Big dollars are at stake, with family offices controlling an estimated $4 trillion in investment capital worldwide. For context, private equity and hedge fund firms are estimated to have $5.7 trillion in investment capital.

Multi-family offices have also experienced strong growth of late. There are an estimated 1,500 MFOs with assets under management of nearly $450 billion, and their number is expected to keep growing as higher costs, lower margins and competition for capital are forcing them to search for operational efficiencies. These factors are also persuading SFOs to merge and become MFOs.

Due in part to the sophistication of the private equity and hedge talent migrating to these offices, along with the increasing deployable capital, family offices are investing more in complicated asset types including equities, real estate, fixed income and private equity, as well as hedge funds. Further, direct investments in these areas have increased dramatically, constituting close to 30 percent of an average family office portfolio.

As technological capabilities are inexorably linked to their key needs, family offices are realizing the importance of technology to their future success. They are also understanding that going it alone is often a difficult option.

Many family offices struggle to understand and manage complex technology offerings, while also meeting the need for deeper service capabilities across accounting, tax and more. Small in-house administrative teams at family offices quickly find themselves over whelmed as the combination of complex transactions and regulatory pressures prove too difficult for them to handle.

These factors will pressure family offices to seek out fund administrators that are best equipped to help address these evolving needs. Over the past few years, fund administrators have been going through a metamorphosis of their own, moving from viewing themselves as offering services focused solely on traditional accounting to becoming a key strategic advisor to private fund managers. This is true across not only accounting services, but also in complicated areas like investor relations, compliance and operations.

The demand for third-party validation of asset values and investment performance is also becoming a bigger factor for family offices, and fund administrators are uniquely positioned to deliver on this need as well.

Lastly, families can sometimes be fickle, and emotions tend to grow more intense as more money is at stake. Family members change through marriages, children, divorces and deaths. A strong and independent voice is critical to not only provide validation and transparency, but also objective guidance that can be taken at face value by family members. This factor increases exponentially with the addition of each family to a family office.

As family offices look to fund administrators to fulfill their needs, they must avoid the common trap of basing their selection mostly on the quality and pricing of the traditional accounting services offered by the fund administrator. Rather, family offices should give equal importance to the technological experience and capabilities of the fund administrator across areas like investor relations, operations and compliance.

Any family office that decides to go it alone will need to make sure to select the right technology provider that can help them not only with the front-end digital performance reporting and communications, but also with the operational middle and back-end of data preparation, analysis, and distribution.

Balancing Innovation and Risk Through Disciplined Disruption


balance.png

The digital disruption reshaping financial services mirrors the disruption brought about by Netflix, Uber, Lyft and Amazon in other sectors of the economy. What distinguishes financial technology companies is the financial and personal information their consumers entrust them with. The savviest fintech companies are those that employ discipline and structure to manage risk.

Many fintech companies adopt a fast-failure approach: move quickly and accept mistakes as necessary for innovation. Coordinating innovation with risk management might seem cumbersome. But if innovation is not integrated with effective risk management, companies risk running afoul of regulatory or compliance responsibilities.

One challenge fintech companies face is the sheer number of regulators that have rulemaking or supervisory authority over them due to unique business models and state level licensing and regulators. In the absence of a uniform regulatory scheme, there is widespread confusion about rules, expectations, oversight and regulatory risk. Many fintech companies and their banking partners remain uncertain about which laws and regulations apply or, most importantly, how they will be supervised against those rules.

A potential solution to this problem was the announcement in December 2016 by the Office of the Comptroller of the Currency (OCC) that it intended to create a special purpose national bank charter for fintech companies. The OCC aims to promote safety and soundness in the banking system while still encouraging innovation. A special purpose national bank charter would create a straightforward supervisory structure, coordinated by one primary regulator. This has turned out to be a controversial proposal, since the Conference of State Bank Supervisors has sued the OCC in federal court claiming that creation of a fintech charter would be a violation of the agency’s chartering authority.

Common Weaknesses
Executing an effective risk management plan in an innovative culture is challenging. Companies should be alert to the following common areas of weakness that can create vulnerability.

Compliance culture: Fintech companies often have more in common with technology startups than with financial services companies, which becomes particularly notable when maintaining a compliance management system (CMS). Compared with banking peers, many fintech firms generally have less mature compliance cultures that can struggle under increased regulatory scrutiny. The lack of a comprehensive CMS exposes companies to considerable risk, particularly as regulators apply bank-like expectations to fintech companies.

Risk assessments: Many companies fail to move beyond the assessment of inherent risk to the next logical steps: identifying and closing gaps in the control structure. Assessing the control environment and continually aligning an organization’s resources, infrastructure and technology to pockets of unmitigated risk is critical.

Monitoring and testing: Fintech companies can fail to distinguish between monitoring and testing, or understand why both are important. When executed properly, the two processes provide assurance of sound and compliant risk strategy.

Complaint management: Many organizations become mired in addressing individual complaints instead of the deeper issues the complaints reveal. Root cause analysis can help companies understand what is driving the complaints and, if possible, how to mitigate similar complaints through systemic change.

Corrective action: Finally, because of their fast-fail approach, fintech companies do not always follow up to remediate problems. Companies need feedback loops and appropriate accountability structures that allow them to track, monitor and test any issues after corrective action has taken place.

Strategies Across the Organization
Fintech companies should define clear and sustainable governance and risk management practices and integrate them into decision-making and operational activities across the organization. There are a number of actions that can help companies establish or evaluate their risk management strategies.

Assess risks: Because the fast-failure approach can ignite risk issues across the board, companies should evaluate their structure and sustainability of controls, the environment in which they operate, and their leadership team’s discipline level to measure the coordination of risk management and operational progress.

Identify gaps: Often, these gaps (for example non-compliance with certain laws and regulations, ineffective controls or a poor risk culture) represent the gulf between risks and the risk tolerance of the organization. A company’s risk appetite should drive the design of its risk management strategy and execution plan.

Design a road map: Whether a certain risk should be managed through prevention or mitigation will be driven by the potential impact of the risk and the available resources. Defining a plan within these constraints is important in explaining the risk management journey to key stakeholders.

Execute the plan: Finally, companies should deploy the resources necessary to execute the plan. Appropriate governance, including clear lines of accountability, is paramount to disciplined execution.

Successful companies align their core business strategies with effective risk management and efficient compliance. This alignment is especially important in the constantly changing fintech environment. Risk management and innovation can and should coexist. When they do, success is just around the corner.

John Epperson, principal with Crowe Horwath LLP, is theco-author of this piece.