Frontiers in Finance for Decision Makers in Financial Services March 2008

frontiers in finance for decision makers in financial services March 2008

FINANCIAL SERVICES

Retail banking in focus: The future of payments Challenges looming?

Retail banking in the U.K. and the U.S. An inside perspective from Terri Dial, Lloyds TSB

After the credit crunch Where now? he financial services sector The ways in which consumers Introduction has been much in the news use retail banks are changing rapidly. frontiers in finance recently – and the news The payments industry faces significant March 2008 has not been good. Within challenges – and opportunities – from the space of a few months, the continuing move away from cash we have seen the onset of to a range of electronic alternatives. Ta severe credit crunch, a liquidity crisis Mobile payment technologies are at Northern Rock leading to a run on the making rapid inroads in Asia Pacific. bank and Société Générale revealing it In Europe, SEPA, the Single Euro has lost €4.9 billion ($7.1billion; £3.7 billion) Payments Area, now being introduced, closing out massive unauthorized trades will have profound implications, perhaps placed by a rogue employee. Some not yet fully appreciated. The move to respected commentators are speculating real-time payments presents additional Brendan Nelson Vice Chairman, KPMG in the U.K. about the onset of a global recession. challenges, most notably in relation Global Chairman, Financial Services This edition of frontiers in finance is to the increased potential for fraud. primarily focused on retail banking, but Meanwhile, despite the background touches on all of these themes. While of turbulence and uncertainty, the it is impossible – and foolhardy – to imperative of improving the efficiency predict in detail how the credit crunch and effectiveness of current business will play out, some general implications models remains. Banks are increasingly can be foreseen. And the rest of 2008 realizing the need to become more looks certain to be a bumpy ride. customer-centered. Despite those On the other side of an increasingly- who believed – or hoped – that it might connected globe, China’s capital markets wither away, the branch network continue to expand. The sheer size of remains an important channel, and the sums of money involved means that improving branch effectiveness can the country is already a significant force. contribute to sales growth. The authorities are steadily liberalizing Islamic banking is forecast to grow China’s exchanges. Stock market twice as fast as conventional banking, capitalization has risen ten-fold in just and the race for success in this niche 2.5 years. Bond and derivative markets market is hotting up. are less well-developed as yet. But An effective economic capital unless there is a dramatic policy U-turn framework is increasingly essential by the government, these are likely to help quantify risk and satisfy to follow suit. regulatory requirements. The issues raised above highlight retail banking’s need to improve its innovation performance in both products and services. We hope you find this edition of frontiers in finance informative and thought-provoking.

Brendan Nelson

Series Topics: Fighting fraud Islamic finance: Watch this space 34 Emerging markets: China rising: Stocks, bonds and derivatives in 16 the world’s most dynamic economy 38 Knowledge In this section: 42 Updates from KPMG member firms, thought leadership, contacts

Topics: After the crunch. Where now? 38

Series: China rising

he war for talent in retail banking is significant. As an Texample, in the Gulf region, driven by on-going consolidation in the banking industry, fast growth in emerging markets and the spread of new opportunities such as Islamic banking, the competition is fierce Knowledge Process Outsourcing for high quality human resources. To highlight the point, a survey Outsourcing’s third generation comes of age of Gulf Compensation Trends on GulfTalent.com in 2007 found he outsourcing trend shows sector alone is expected to be salaries in the banking sector rose no sign of slackening. And as worth US$5 billion by 2010. KPO by 9.8 percent between August Tit matures and develops as may now be considered a bona fide, 2006 and August 2007. a prime strategic tool, it is moving mainstream outsourcing option. Conversely, the drive towards up the operational value chain. Within the financial sector, KPO trends such as employing new Outsourcing began with IT has already been used to handle – technology and outsourcing are Outsourcing (ITO) in the 1980s, among other things – credit scoring, having a different impact on when strategies were put in place loss protection calculations and fraud employment in the industry. In 2006 for third parties to manage IT systems analytics. KPO may still only represent the spend on information technology maintenance, development and a small percentage of the total in the banking sector reached application. In the 1990s, this was outsourcing market but, with the US$63.7 billion1 according to banking followed by Business Process financial sector demonstrating just technology consultant Art Gillis. Outsourcing (BPO) which focused on what it can be used for, its use is set The drive to facilitate high relatively elementary and standardized to increase exponentially. volume/low value transactions, on processes. More recently, there has Shamus Rae, Partner in KPMG’s line banking, and automated clearing been a growing trend to outsource Sourcing Advisory practice, points out: houses will continue to mean fewer what might be seen as core value- “One of the most surprising aspects employees are needed. adding activities: Knowledge Process of KPO is that it focuses on the high- This coupled with outsourcing Outsourcing (KPO). end activities which were traditionally and offshoring functions from back KPO involves outsourcing more considered part of a company’s office operations to IT have also highly skilled processes than has competitive advantage. In this regard, seen further reductions in numbers. previously been the case with other this marks a major stepping stone The newer trends of multi-sourcing, outsourcing methods, basing its for the outsourcing industry; moving joint ventures and collaborations appeal on intellectual arbitrage rather from being at the periphery of the may also have a similar impact, than the cost reduction potential of its enterprise to the very heart of it. which has led some to challenge counterparts. A recent KPMG report1 Now it is there, the possibilities if trends continue to reduce the claims that KPO has now come of are endless.” talent pool. age, revealing that the market for KPO 1. Knowledge Process Outsourcing: Unlocking top-line growth 1. Banks are Spending More on IT , But Vendors Are not getting services in the Financial Services by outsourcing ‘the core’, KPMG in the U.K., 2008 It All, Art Gillis, October 2007

Restructuring business operating models The way to drive business value in insurance

uropean insurance firms continue legacy structures are leading to integrated to allow them to provide to face ever-greater competition competitive disadvantage, in particular the necessary comprehensive level Efrom their offshore competitors in the corporate sector where many of insurance cover across the globe. – at a time when local regulatory insurers now demand seamless global Some are focusing on improved risk standards are multiplying, and the coverage for their insurance programs. management and more dynamic capital European tax regime is relatively The sector is also facing the challenges allocation, including restructuring their onerous. With a plentiful supply of of heavier demands from rating capital to offer improved security to capital and low or zero tax rates, agencies, the focus on short-term clients. Others have taken more drastic insurers based in countries such as returns as new forms of capital enter action, turning to tax and regulatory Bermuda appeared to have a clear the market, and for general insurers, arbitrage to secure the best result. cost advantage over their European the need to deliver consistently All of these trends are leading firms counterparts. Together with higher throughout the cycle. to restructure their business European regulatory capital In response to the increased arrangements and market access requirements, this is driving a competition, insurance firms are platforms more efficiently, and to significant differential in the overall examining their strategy to find create a complementary, flexible return on capital. innovative ways to derive business capital structure. This external competition is value and to ensure that they remain compounded by the fact that many competitive. Many are looking into ways KPMG member firms will shortly be insurers have legal, operational and of improving their insurance service launching a series of white papers capital structures that have evolved offerings. For example, in the case dealing with this and other topics. For more information please contact: over many years, leading to of global corporate clients, firms are Claire Gobey inefficiencies and damaging operational considering how their group insurance KPMG in the U.K. performance. In some instances these operations can best be structured and e-Mail: [email protected]

The Turkish banking sector

he Turkish banking sector, growth rate of almost 30 percent. particularly the retail banking Profits grew even faster, at a rate Tsegment, has witnessed robust of more than 38 percent1. growth in recent years. A domestic This growth has generated banking crisis in 2001/2 was followed considerable interest among foreign by four years of high economic bank investors. The major players, growth, rising industrial production, and recent transactions are: the establishment of an independent central bank, structural reform – HSBC, which has been present for (including privatization) and political a number of years and is the tenth A final area of recent and potential stability. Growth picked up again in largest bank in Turkey future growth is in Islamic banking. 2007 after a poor year in 2006. – ING, which bought 100 percent The number of Islamic bank branches Prospects for the future remain of Oyak Bank in December 2007, increased from 355 to 422 in 2007 strong (subject to the challenges of in a transaction valued at around while the combined assets of the four a possible global recession) driven by US$ 2.7 billion2 Islamic banks increased by 63 percent two factors. Firstly, Turkey has good – Fortis, which is now the eleventh in dollar terms to aggregate US$13.3 demographics, with a large, young largest bank in Turkey, and is billion in 20074. population and a high birth rate. pursuing a strategy of organic growth Turkey is a dynamic and developing Secondly, despite some undoubtedly – Citigroup, which acquired 20 percent retail banking market… one to watch tough negotiations ahead, there of Akbank in May 2007 in a US$3.1 for the future. remains the prospect of EU accession. billion transaction3

The banking industry has grown 1. The Banker, July 2003 and July 2007 strongly. Total assets of the top five Approximately 25 percent of bank 2. ING closes Acquisition of Turkey’s Oyak Bank, December 2007; Turkish banks grew from approximately capital remains in the hands of the Oyak Bank US$78 billion in 2003 to approximately Turkish state, holding out the prospect 3. Citi-Akbank partnership celebrated in New York, May 2007 4. Participation banks expect further growth, Turkish Daily News, US$214 billion in 2007, a compound of further privatization. January 2008

© 2008 KPMG International. KPMG International is a Swiss cooperative. 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. frontiers in finance – March 2008 | Topics Retail banking in the U.K. and the U.S. An inside perspective Terri Dial was appointed Group Executive Director, U.K. Retail Banking, Lloyds TSB in 2005, after 29 years with Wells Fargo in the U.S. Terri recently talked to David Sayer, Partner in KPMG’s Financial Services practice, about her impressions of the differences – and similarities – between retail banking in the two countries. Terri Dial Group Executive Director Lloyds TSB t is hard to talk about the Consumers here have a different set would have addressed problems with differences between the U.K. of expectations. Customers in the U.K. customer dissatisfaction a lot earlier. and the U.S. because, of course, are quite different from those in the U.S. Despite this, retail banking it requires a lot of generalization, For example, they’re a lot less likely to everywhere in the developed world has and the truth is the way a number engage in switching behaviors than the many of the same issues. It is a very of British banks operate is very typical U.S. consumer. U.S. consumers mature business, highly commoditized “Isimilar to U.S. banks. But there are are accustomed to switching, because in many categories. Growth is very some notable differences between the U.S. has never had national banking. difficult to come by, and there’s already the consumer populations of the two Consumers have got used to changing been a large take-up of financial product countries. For example, in the U.S. their accounts if they move home, usage. The best banks compete by consumers are extremely convenience- because they have to. So there’s a doing the best job of retaining and oriented and very time conscious. culture that’s much more accepting upselling to their existing customers. That is beginning to emerge here in the of switching than we have in the U.K. Acquiring new customers is important U.K. but nowhere near to the degree That’s a wonderful thing because it to develop the business. But the core it has reached in the U.S. Americans avoids that very expensive constant challenge is to maintain the franchise so will pay to save time. They’ll pay for churning of the customer base that the that you have the opportunity to upsell convenience. British consumers want U.S. has to live with. The downside, to your customers. This means doing things to be faster, more convenient, however, is it also allows U.K. banks a better job of getting to customers, but at the end of the day, given a choice sometimes to be apathetic to such a or doing a better job of identifying between a pound and time saved, degree that ultimately it comes back what customers’ needs are and serving they’ll take the pound; it is just part to bite them. For example, if they had them, or doing a better job of innovating of the culture. faced more churning behavior, they new products to meet financial needs.

Service is an interesting paradox, happening. When it did start to because on the one hand, if you happen, it happened in a very don’t get service right, maintaining Consumers have power unexpected way. There were articles that franchise is difficult. But in a written 10 or 15 years ago predicting commoditized world where margins are today that we never who would be the large national ever decreasing the objective is service, dreamed of. It is a global players. Well, there is still no national but at some affordable cost. What the player: the most national player in the better banks are aspiring to these days world, and we’re U.S. is in only 26 states. And looking at is about how to go beyond service to competing on a global who were predicted to be those large create customer intimacy and customer scale. It is really tough national players, I don’t think it turned advocacy. And you’ve got to figure out out as predicted. So is there likely to how to get there and do it in a low- and I predict it is only be pan-European consolidation? I think margin, commoditized business. going to get tougher. probably there is. But having lived When I first came to work in the through it in the U.S., I’m not about U.K., people said to me you’re really to make any public predictions. going to be shocked at how much The thing about principles-based I had dinner recently with the regulation we have here. One of the regulation is there’s no safe harbor. CEO of a U.S. bank and he was saying: examples they gave me was about The biggest difference I see in “You know, I just am not sure who’s regulation that was required for regulation between the U.K. and the having fun anymore these days.” mortgage disclosures. In fact, this was U.S. is that we’re already way down I think what he meant was, it is really half the burden, and 20 years later, than the path of principles–based regulation. hard everywhere.This was a U.S. banker. what we were dealing with in the U.S. Another thing you have to remember But I could have been sitting with an Regulation is everywhere, part of our is that in America, there’s a fairly benign Italian banker or a German banker and normal governance. It is part of the attitude towards business. In the U.K., the conversation wouldn’t have been success of our industry. there is a general distrust of business, any different. Consumers have power The biggest difference between big business in particular, and especially today that we never dreamed of. It is the U.S. and the U.K. is not in the big businesses like banks. For example, a global world, and we’re competing degree of regulation, but in the concept a recent report showed that British on a global scale. It is really tough and of principles- versus rules-based banks had improved their service levels I predict it is only going to get tougher. regulation. The U.S. still operates much quite significantly over the last decade, But the more I thought about it, more on a rules-based model. But to the point where in every category the more I thought: you’d better find principles-based regulation is going they were now at or above the world a way to have fun out of the challenge, to hit the U.S. as it has the U.K. It is average. But for the media that was because who the heck wants to do it difficult to imagine how perplexing not the right story. So the headline and not have any fun? it is, for people used to rules-based was “British banks lag global leaders”. regulation, to deal in a world where the That’s just the nature of the game. principles are actually very vague. If I It is a changing landscape as we all For more information please contact: walked down the street and asked ten know. The question of pan-European David Sayer Partner consumers what the word ‘fair’ means, retail banking reminds me a lot of KPMG in the U.K. I’d get ten very different answers. And consolidation in the U.S. We predicted Tel: +44 20 7311 5404 ” yet we have a principle of fairness. it for 20 years before it actually started e-Mail: [email protected]

Banking on innovation

n innovation

Retail banking does not have a strong reputation for innovation. Far from the world of high-tech development, iPods and Dyson, retail bankers tend to be seen as staid, constrained by regulation and content to rely on minor variations to a limited range of existing offerings. This is not entirely fair. Many senior banking executives recognize the potential value of innovation in both products and services, and are trying to improve their performance. But they have a long way to go. In this edited version of a recent report1, Michael Robinson and David Sayer, consider some of the key issues.

One of the clearest conclusions to be drawn from studying the most successful companies is that those which sustain the highest share price are those which are the most consistently innovative.

any senior retailers or utility companies are characterized by constant, creative executives in retail taking a growing share of the market. product innovation: witness the banking would New payment technologies threaten proliferation of derivatives and probably claim that conventional cash transactions. structured finance products in they understood the To be sure, the substantial and investment banking in recent years. challenges facing increasing regulatory burden on the retail And in retail banking itself, consumer Mthe industry. In a sense, they would banking sector constitutes a significant channels have been revolutionized in be right. The challenges of structural barrier to entry. But who dares bet recent years by the Internet, both in change, increasing regulation, tough against a truly disruptive new technology terms of online banking with traditional competition and more demanding or business model? Customer inertia is banks and through the launch of customer expectations are routinely perhaps the only significant constraint Internet-only banks. expounded. But in a more profound on retail banks losing their grip on their However, retail banking innovation sense, these executives would be markets, so the potential for dramatic mainly focuses on how products and wrong. They do not – and cannot – change is ever-present. services are delivered to the customer, understand the most significant One of the clearest conclusions how the customer interaction is challenges facing their business, to be drawn from studying the most managed and how back-office because the genuinely threatening successful companies is that those operations are carried out, rather than developments are those which are which sustain the highest share price on the development of radically new unexpected and unpredictable: the truly are those which are the most retail financial products. Many new threatening challenges – those which consistently innovative2. In a virtuous products are incremental developments have the potential to destroy existing circle, innovation underpins success and of a small range of fundamental businesses – are those which result success generates innovation. In retail offerings: loans, mortgages, savings etc. from disruptive innovations, whether banking, as in other sectors, meeting the So where is sustained innovation in these focus on new technology, new real challenges of the future will depend retail banking coming from? How do business processes or completely on constant and intensive innovation in bankers themselves rate their newFigure business ? Effective models. innovation processes systematicallyproducts, servicesidentify, develop and processes. and innovation performance? How great To date, retailprogress banking ideas hasfrom avoided both inside and outsideIt is commonly the organisation said, both within and is the challenge they face? To explore such disruptive shocks. But online outside the sector, that retail banks are these issues, KPMG in the U.K. and banking has already transformed especially poor at innovation. But it is Innovaro Ltd. mounted a joint review. customer channels. Non-traditional not as simple as that. To begin with, This involved structured face-to-face banking providers such as large some banking sectors, at least, are interviews with senior executives – CEOs, and CXOs in Strategy, Marketing and Innovation roles – of U.K., U.S., Figure 1 Effective innovation processes systematically identify, develop and progress ideas from both inside and outside the organization Dutch and Irish banks. Overall, the banks surveyed rated themselves only between average and Stimulus Ideation Development Delivery Impact good on the innovation scale. Some felt they were at the leading edge in Uncertainty individual areas, with pockets of innovation; others that they were only Foresight (5–10 years) average or worse. Nevertheless, there Trends was a clear view that innovation would (3–5 years) be a major contributor to business Insight Predictability (1–2 years) performance in future, especially in the areas of new products and new Time Innovation Partnerships business models. Given the generally Innovation Toolkit lukewarm assessments of current Innovation Metrics performance, there is an obvious conclusion that retail banks need to Source: KPMG International, 2008 raise their game – and recognize this.

Three questions to Jörg Hashagen, Global Head of Advisory, Financial Services

transactions. Nowadays, they still value So how does the branch need to adapt? the retail branch network but the branch Customers are increasingly looking for a has a very different role to play from the strong relationship with a highly-qualified one it had in the past. advisor when it really matters. They want to speak to the best-informed people. So you think the branch still has a future? They don’t want to suffer a hard sell. Absolutely. But to understand what that They want to be seen as individuals, and future is, we need to appreciate what advised by people who understand their customers don’t want branches for. particular circumstances and needs. They A survey1 we carried out recently confirms are prepared to schedule appointments, that many customers visit their branch travel the extra mile or use other means In line with thoughts raised on the rarely. Cash points mean they can withdraw of communications as long as they are importance of innovation, how have cash from many outlets. Internet banking talking to experts they trust. The key to the consumers’ attitudes to the retail bank means they can manage many financial customer relationship is neither the bank branch been changing in recent years? transactions from the comfort of their nor the branch in particular, it is the access Consumers used to value above all home. It is also clear that different to qualified specialists, and personalized location, convenience and efficient customer segments demand very different service. The challenge for retail banks transaction of business. Since they visited relationships with their banks. However, is how to deliver that through a branch their retail bank branch often, they didn’t what most customers still need, and want to network, but at a reasonable cost. want a long journey to get there, or long visit banks for, is specialist financial advice – queues when they arrived. However, with about a mortgage, or a loan, or an insurance 1. Survey into the future of retail bank branches published the rise of telephone banking, Internet policy. Customers turn to a financial advisor by KPMG in Germany, 2007 under the original title: Mythos banking and so on, consumers began when the transactions they are considering Filiale – was Bankkunden wirklich erwarten! Ergebnisse einer Privatkundenbefragung zur Zukunft des to use branches less for routine are perceived as important or significant. filialfokussierten Bankvertriebs

From previous Innovaro research it examples in other industries. In many For more information please contact: is evident that, across multiple sectors, other sectors, there is a growing trend Michael Robinson there are five common capabilities that towards a more open style of learning, Partner KPMG in the U.K. innovation leaders clearly possess with the concept of ‘innovation Tel: +44 20 7694 2904 and exploit: discovery’ becoming commonplace – e-Mail: [email protected] where those companies starting their Strategic Focus – The most successful innovation journey target specific David Sayer and innovative companies in other leaders from which to learn and Partner KPMG in the U.K. sectors have a clear focus on the role use various mechanisms to stimulate Tel: +44 20 7311 5404 of innovation within their markets and innovation within their own organization. e-Mail: [email protected] the contribution that innovation makes Some of the banks in the survey are to the business. beginning to do this, particularly Ian Pallister Insight – Innovation leaders focusing on the general retail and hotel Director Innovaro Limited demonstrate an excellent understanding sectors, which clearly suggests a focus Tel: +44 20 7866 6184 of their marketplace and customers, on service innovation. And some banks and an ability to configure products are deliberately looking to external and services around emerging needs. recruitment, consultants and the Collaboration – The most effective use of their own non-executive innovators have a clear understanding directors to stimulate more effective of their core capabilities, and of their innovation processes. partners, and work together to deliver Some of the most enlightened retail innovative products and services. They banks recognize that other industry adopt formal open innovation approaches sectors have a great deal to teach them More information and exploit technology scouting. about how to implement a structured Process – They use simple, yet innovation management and delivery You can find more in-depth information effective, pipeline/portfolio approaches process. KPMG member firms believe about this topic in the following KPMG to conceiving, qualifying, developing that the most successful retail banks survey report: and then quickly launching new of the future will be those which take products and services. these lessons to heart and act on them. Organization – In the most successful For the rest, there will be a risk of companies, roles, responsibilities and succumbing to the profound and culture all support innovation, while unexpected challenges we have Please contact one of the KPMG authors, appropriate metrics are used to measure seen hit other industries. should you wish to and reward successful innovation. receive a hard copy 1. Banking on Innovation? The challenge for retail banks. It is clear that retail banks have Joint report by KPMG in the U.K. and Innovaro Ltd, November 2007 of this report. quite a way to go to match the best 2. cf Innovation Leaders, http://www.innovationleaders.org

Banks have a commitment to keep payments moving quickly through the system,but initiatives like Faster Payments can increase the risk of fraud, giving significantly less time to catch suspect transactions. What are banks doing to identify, monitor and control these risks, and provide the confidence their customers demand? David Luijerink and Altaf Dossa track current industry best practices in the battle against fraud. Fighting fraud

Quick wins

Some key considerations to help prevent, detect and manage payment fraud include:

– having a clear understanding of payment processes to determine orldwide Better analytical capability: potential fraud risks and assess payments fraud Recruiting and sharing existing procedural and is a growing Better data analysis doesn’t just mean system controls – leveraging existing investment problem for banks. developing ever-more sophisticated in detection solutions to obtain The potential cost software. From a practical viewpoint, a more holistic view of the of fraud can go it also means recruiting good quality impact of fraud across various Wfar beyond what criminals succeed in analysts who can spot fraud patterns and financial products stealing: sanctions from regulators, scenarios, and enhance the detection – having a clear methodology for investigating potential fraud cases, reputational damage and fraud-proofing rules. As well as smart software and smart and clear escalation and systems also take a major financial toll. people, there should be a continued drive reporting processes Banks already operate many excellent for better cooperative efforts between all – making better use of historical fraud initiatives in terms of cyber security and of the institutions affected. New fraud information to develop the concept fraud prevention and detection – but scenarios detected by one institution of a fraud center of excellence for better information sharing. how can they keep up the fight against can help others in quickly updating their this continually evolving danger? automated and manual detection systems – helping to prevent the migration of and prevent employees from activities Real-time monitoring: fraudsters across institutions. such as downloading account details The time is (nearly) now Many of the major banks already to sell on to unauthorized third parties. Faster processing of transactions cooperate well, but some international increases the pressure on banks to financial institutions and mid-tier players Consider macro issues, too have robust detection technologies could be encouraged to do more.There is Since the start of the current decade, and management capability to spot also a great deal governments, regulators financial institutions have been highly and investigate possible fraud. Many and law enforcement can do to support proactive on a range of financial crime banks already use near-real or real-time future sharing of data across borders. issues. To stay ahead of the fraudsters, monitoring on card payment systems, banks need to be vigilant and continue but some are still batch processing, Better decision-making: to develop their understanding of the using next-day downloads. Time lags Focusing on the ‘needles’ threats and risks they face at micro level. like this make life easier for the Technology-based systems are now They also need to consider the broader fraudsters. Moving from batch also helping fraud officers towards more issue of financial crime as a whole, and processing to real-time detection is effective decision-making on whether to cooperate on fraud prevention initiatives vital if banks are to have a realistic approve or decline transactions. These with the other payments industry chance of spotting abuse in future. systems can integrate in-house data participants and public authorities. This is obviously a big challenge and sophisticated statistical analysis Given the massive potential for cross- for international transactions. It will be with external information such as credit border fraud and the constant attack some time before financial institutions checks, the details of known fraudsters from organized international gangs, around the world are all geared up to and data on other bank accounts they joining forces is essential. provide information on a real-time 24/7 may hold. Through these methods, valid basis. Even if they could, problems with transactions can be screened out, giving data integrity may necessitate extra a clearer picture of those more likely For more information please contact: checks and slow the monitoring process. to be fraudulent – stripping away the David Luijerink Director Real-time monitoring of international haystack, if you like, and leaving the KPMG in the U.K. payments should help reduce the time ‘needles’ in view. This forensic Tel: +44 20 7694 5008 between potentially fraudulent approach allows banks to use their e-Mail: [email protected] transactions and discovery. Initiatives specialist resources more efficiently like the European Commission’s and effectively. Altaf Dossa Senior Manager Payment Services Directive should KPMG in the U.K. help to make it a reality within the EU, Beware of the insider Tel: +44 20 7311 3658 for example, by harmonizing rules and Occupational fraud – when an employee e-Mail: [email protected] integrating the processes around uses his or her position to defraud a payment transactions. On a global basis, bank – is also a growing concern. Banks countries with a developed banking are incorporating information security environment could potentially share measures to prevent insider fraud: confirmed fraud data on a regular basis. these systems effectively detect

The future of payments Challenges looming?

he business of payments Speed vs security business model makes sense for many. is likely to undergo rapid Although the clearing cycle is being Banks must find a new way of working change over the next ten reduced – to one day in many cases – in partnership with organizations that years, primarily driven by and charging structures are being made may compete in other areas of increasing customer much clearer, this is unlikely to satisfy business. Although historically poor at demands and market customer demands, which are driven managing these partner relationships, Tpressures. Banks that do not meet by expectations of true real-time most banks will need to evolve ‘win these challenges will probably see behavior and visibility of all aspects win’ long-term relationships with the erosion of their customer franchise. of the transaction. Regulators will also business partners. The scope of the payments industry continue to demand faster processing will increase, from around 70 billion of payments. Some of these demands Consolidation and new entrants transactions a year in Europe to several are incompatible with the stability and There will be significant consolidation hundred billion, as a much wider range security of the payments system, and within the clearing and settlement of transactions and front-end processes, with increasing pressure to control fraud infrastructure, and some banks will from telephony, transportation and and uphold anti-money laundering leave the payments business by government, are conducted on ‘open’ practices. There will inevitably be outsourcing or divesting; there will platforms and systems, and electronic continuing tensions along the be many more new non-bank players payments displace a proportion of the boundary between consumer performing mainly front-end services. enormous volumes of cash and closed- desires and regulation. Banks should recognize that payments loop billing transactions. Alongside the is no longer a business area in which inevitable turmoil this structural change Scale and service they reign supreme. Innovative payment will bring, payment services providers Payments is a scale business and offerings enter the space from a variety will face challenges on many fronts. banks and other industry players should of new entrants, PayPal and its secure Personal customers will welcome begin thinking now about how they online products being only one the substitution of card payments for can serve their customers best. By example. If more transactions are cash. Corporate customers cry out for providing efficient services, large scale processed for customers by other value-added services, such as payment operators (like major global banks) will providers, banks run the real risk data being linked with other, important acquire business on price, but will retain that they will fail to notice a information relating to trading it by providing evermore sophisticated fundamental shift in the nature transactions. Governments and products. Smaller players, with lower of the banking relationship. regulators see payments as a business volumes, will struggle to compete Payments evolution will yield with significant network effects and for payments business on a additional market impacts across the therefore will continue to impose profitable basis. value chain. Infrastructure providers regulations similar to those already in As payments is a core service for across the EU – leading providers place for telecoms operators, such as the banks, there is a need for sustainable include VocaLink and Equens – will also requirement for independent directors long-term relationships across the entire be affected by the changing landscape. on the Payments Council in the U.K. value chain, and a component-based Smaller infrastructure providers will be

None of the respondents to the survey appeared to feel their existing Banks should recognize that payments is no longer business model was under threat. Yet they all pointed to evidence that a business area in which they reign supreme. suggested they could be. Although banks will continue to play a role in the payments value chain, it is highly likely forced to consolidate as banks, which step towards the demise of the check, that this role will have changed are both shareholders and customers, and governments would be pleased to substantially by 2017. recognize that price and service pressures support the replacement of the check demand a rapid transformation to more with an equivalent electronic method, efficient and higher-scale models. no product yet offers the necessary For more information please contact: flexibility for dual signatories, ability of David Sayer Partner SEPA both payer and payee to control value KPMG in the U.K. The advent of the Single Euro Payments dates etc. In fact SEPA has put back Tel: +44 20 7311 5404 Area (SEPA) will reduce the number the disappearance of checks, since e-Mail: [email protected] of accounts customers hold and the neither the SEPA Credit Transfer (SCT) number of instruments available; it is nor SEPA Direct Debit (SDD) meets already leading to consolidation in these requirements. 1. The full report, The Future of Payments: opportunity or threat processing and will shortly lead to for Europe’s banks? KPMG in the U.K., February 2008 consolidation in banking. Banks are Conclusion resigned to the reduction in margins that Today, it may be difficult to see a clear the more homogeneous products will business case for the digitization of cash, bring. They see no enthusiasm among for providing value-added corporate More information governments to support or even use the customer services, for partnering with new products while current products competitive organizations, but banks that You can find more in-depth information exist, and businesses – who were do not meet these challenges may be about this topic in the following KPMG supposed to be the main beneficiaries too late as proactive competitors seize survey report: – are not ready for the change. Few the market. KPMG member firms banks are planning to take advantage believe that while some banks are of the deregulatory aspects of SEPA. approaching these payments challenges with a real sense of urgency, the Checks hang on majority are proceeding at a ‘business Please contact David Sayer, Many people assume that checks are as usual’ pace. These banks may find should you wish to in terminal decline and will disappear they have not done enough to position receive a hard copy without bank action. Although retailer their organizations as successful players of this report. non-acceptance of checks is a major in the payments industry of the future.

The Single Euro Payments Area now being introduced has received surprisingly little publicity. Yet over the next couple of years it will have a major impact on the way payments are managed, within the Euro zone and beyond. And it is not only financial services firms that will be affected. The implications will extend across public administration, large and medium-sized companies, and consumers,too. Davide Grassano, Alessandro Carone and Pamela Regazzo explain. S PA Deserving more attention

he Single Euro Payments market for the whole Euro area. increase the number of transactions Area (SEPA) is a joint There will be no distinction between made with payment cards to reduce initiative between the cross-border and national payments. the cost of managing cash. European Commission and Customers (companies, public Consumers and corporate users the banking and payment administration and individual consumers) of cross-border payment systems will services industry, designed will be able to use payment services benefit from the ease and simplicity Tto create a single market for payment across the Euro zone in a uniform way, of SEPA products, and also from the services across the Euro zone. Although and will be free to choose banking, credit improved transparency of pricing and the introduction of the Euro delivered card and payment products which suit guarantees of service levels and a common currency in member states them best, regardless of their country compensation which the new which adopted it, payment systems, of origin. SEPA will also harmonize regulations will mandate. processes and regulations have so regulation and improve security For banks and other payment far remained separate and distinct in standards – for example by requiring services providers, however, the individual states. The consequences that all credit and payment cards outlook is more mixed. SEPA offers have been continued inefficiencies in comply with the EMV1 standard, opportunities and poses potential cross-border payments, higher costs requiring the replacement of magnetic threats to the existing business model and lower competition. stripe technology with an integrated in the payments market. On one side, SEPA will change all this. As from chip. In Italy, the increased security streamlining systems and consolidating end of January 2008, banks and service of the EMV chip has significantly back-office processes will be a must; providers will be launching SEPA reduced fraud levels especially on at the same time systems development products, with the aim of providing the international debit circuits, in the and integration will become simpler full coverage by the end of 2010. SEPA migration from magstripe technology. without the need to accommodate will remove all technical, legal and It is expected that lower levels of incompatible national payments commercial barriers between the current fraud, combined with the announced systems, opening up access for all Euro national payment markets so that these ‘War on Cash’ by some national zone banks to the offering of vertical become a single ‘domestic’ payments banking associations will help packages implementing SEPA-compliant

SEPA and the Payment Services Directive

The European Commission’s Payment building block for the creation of SEPA. Services Directive (PSD) is designed to To establish the necessary legal framework provide the legal framework for creating to underpin these changes, the PSD will: a Single Euro Payments Area (SEPA). The Directive has to be incorporated – establish a new regulatory regime into member states’ national legislation for payment institutions, harmonizing as soon as possible, and in any case 25 sets of national rules, which payment solutions. On the other side, by November 1, 2009. currently differ significantly SEPA will also create a single Euro SEPA aims to make all electronic – introduce conduct of business rules payments across the Euro area – by credit for all payment service providers, zone-wide competitive payments card, debit card, bank transfer or direct requiring them to provide information market. Over time, the increased debit – as easy as domestic payments to consumers to ensure transparency competition will doubtless drive down within a single country. By delivering and establish a common framework of prices in many Euro area countries and common instruments, standards, rights and obligations in relation to the lead to greater consolidation in the procedures and infrastructure, it will provision and use of payment services, improve all Euro payment processes, covering issues such as execution industry. In some countries, the annual ensuring transparent pricing and prompt times, defective execution and service charge on a retail bank account transfers. In doing so, SEPA will resolve procedures for complaints and redress. can be as high as €250, as opposed three key areas of current difficulty: to €30 elsewhere. Greater competition The principal initial product offered will eliminate these distortions. SEPA – fragmented and often incompatible by providers will be the SEPA Credit payments systems based on Transfer Scheme, which will enable basic, should also open the way to new and national standards non-urgent Euro credit transfers across the innovative payments products. – inefficiency, slow execution and EU, the European Economic Area countries The landscape of payment service significant price variations in payment (Iceland, Liechtenstein and Norway) providers is already marked by an charges to users and Switzerland. A aggregation trend which will lead to – lack of competition in payment services. A SEPA Direct Debit Scheme, which will enable direct debits in Euros on a fewer, but much larger, operators acting During the consultation phase with SEPA-wide basis, is also being developed, Europe-wide. These new entities have the Commission, the payments industry and will be introduced once member already restructured and extended their argued that a harmonized legal states have transposed the PSD into business model and service portfolio. environment was an essential domestic law. Most of them have already started offering Business Process Outsourcing for parts of the financial value chain to large and mid-sized enterprises, trying to exploit new lines of business. The winners will be those operators Many of the larger banks and service providers who take advantage of these are well-advanced in their planning for SEPA. opportunities. Many of the larger banks But smaller and medium-sized banks still seem and service providers are well-advanced in their planning for SEPA. But smaller to be under-estimating the potential impact on and medium-sized banks still seem to their current business models. be under-estimating the potential impact on their current business models. advantages of the benefits SEPA will For more information please contact: Although not a member of the Euro bring. The most obvious will be in the Davide Grassano zone, the U.K. will be subject to the costs and ease of transferring payments Partner regulatory framework created by the to and from suppliers and customers. KPMG in Italy Tel: +39 02 6764 3737 Payment Services Directive (see box). In the medium and longer term, e-Mail: [email protected] There are currently some 400 credit SEPA will allow the consolidation institutions in the U.K., up to 600 credit of a company’s payments, accounts Alessandro Carone unions and around 2,000 money receivable and treasury operations in Senior Manager transfer companies, many of which play one single payments handling center. KPMG in Italy Tel: +39 34830 55 079 an important role in facilitating migrant SEPA will transform the payments e-Mail: [email protected] remittances to developing countries: landscape in Europe. It has implications it is estimated that around £2.3 billion is for the vast majority of companies Pamela Regazzo sent from the U.K. each year2. All should and individuals. Forward planning Manager be actively planning for the potential is essential. KPMG in Italy Tel: +39 02 6763 12677 impact of SEPA on their operations. e-Mail: [email protected] Beyond the payments sector 1. Europay/Mastercard/Visa itself, many large and medium-sized 2. The information is taken from the Partial Regulatory Impact Assessment contained in the July 2006 UK Treasury Consultation companies will be affected, and will Document ‘Payment Services Directive: a consultation document’. The full document can be found here: http://www.hm be offered the opportunity to take treasury.gov.uk/media/5/1/payments_condoc040706.pdf

The precise causes of the credit crunch which hit the financial markets in the second half of 2007 will no doubt be exhaustively debated for some time to come. What is already clear is that the markets have suffered, and are continuing to suffer, from a significant collapse in liquidity and in confidence which has implications for many areas of economic life. There is very real fear of a genuine recession. Without a crystal ball it is impossible to predict with certainty how the current situation will unwind, and rash to attempt it. But there does seem to be a cautious consensus emerging about some of the more likely implications.

Simon Walker and Peter Russell share their current impressions from a U.K. and Australian perspective.

t is instructive to reflect on two and variable market rates, many accurately the extent of their potential of the primary causes of last year’s thousands of borrowers found they exposure or put a firm value on the credit and liquidity crisis, because could not manage. Defaults, risk they were carrying. Unsurprisingly, they provide pointers to two areas foreclosures and repossessions confidence collapsed, and lenders where significant medium- and mounted. Many mortgage lenders with became unwilling to provide liquidity long-term implications can be heavy exposure to the sub-prime sector to borrowers carrying potential liabilities. Iforeseen. The initial trigger for the crisis were forced into bankruptcy. Billions of Over time, liquidity will return, was a growing awareness of serious dollars of losses were suffered by over- where necessary helped by judicious structural problems in the U.S. sub- extended borrowers, concentrated in underpinning of the markets by central prime mortgage lending sector. lower-income groups who could least banks. Institutions have already written Over the previous two or three years, afford them. down close to US$100 billion of value lenders had increasingly been advancing Had this been the only trigger, from loans and securities linked to the finance to borrowers with poor credit the impacts may have been contained, crisis. However, in the two fundamental histories, and on the basis of and confined to the U.S. housing and areas at the heart of the crisis, long- sometimes dubious evidence of mortgage markets. But the critical factor term structural changes are almost income and assets. For example some which allowed the contagion to escape inevitable; it is unlikely that the markets borrowers obtained loans on a ‘stated and infect financial markets across the will return to previous conditions. income’ basis. This generally meant that world was widespread securitization The retail credit market has already only a portion (e.g. 80 percent) of the and selling-on of mortgage loans. tightened dramatically, with lenders borrower’s income was verified by the This was rational, in that it allowed applying much more stringent credit lender. The remaining 20 percent was sub-prime lenders to spread their risks, criteria. Many individuals with poor not verified. There is increasing and investors to gain some exposure credit scores are now finding it difficult evidence of borrower fraud relating to the U.S. market. But the resulting or impossible to obtain significant credit. to the stated income product, and securities, packaged and repackaged to Among other consequences, this will allegations – at the least – of complicity further investors, became progressively progressively make it more difficult for on the part of vendors’ agents. In more complex. them to refinance existing low- and addition much lending was done at very This had two consequences. fixed-rate mortgages when they revert high loan-to-values (on the assumption First, the impact of losses spread to standard variable rates. It is unlikely that rising housing prices would self progressively through the international that such marginal groups will enjoy the correct the underwriting). financial system. More significantly, same access to cheap credit as they did As attractive initial repayment rates it became increasingly difficult for before the crisis, at least any time in the reverted from low fixed levels to high financial institutions to assess next few years.

The credit crunch has brought the downfall of some companies around the globe. Companies that will continue to be at risk are those that have invested heavily in new businesses at high prices with short-term funding.

Similarly, it is unlikely that the funding have dried up. With a high their list. Funding may be obtained securitization market will reopen to current account deficit Australia is through finding shareholders with the full range of opportunities as existed vulnerable to global crises. deep pockets such as sovereign wealth before the crisis. A lesson has clearly In addition to the funding and funds or building strategic alliances with been learned about the risks of buying lending impacts of the crunch, capital parties who are naturally long funds. packages of undefined and hard-to-value management will play an increasingly The credit crunch has brought the securities. Controls will be tightened. important role. Banks that can manage downfall of some companies around Auditors will be more vigilant in probing capital and grow capital without diluting the globe. Companies that will continue the bases of valuations. the returns to existing shareholders will to be at risk are those that have Wider impacts are more difficult to thrive in the new environment. In the invested heavily in new businesses predict accurately, and it is tricky to last few months, we have seen banks at high prices with short-term funding. separate out the relative contributions withdraw share buybacks, issue The big uncertainty is over the of different drivers. The housing market debt/equity hybrid instruments and R-word. Sentiment has clearly turned in the U.S., U.K., and Australia is clearly issue fresh stock to strengthen balance bearish, and the risk is that the markets softening. In the U.S., this is in part sheets. It is also likely that we will see will talk themselves into a recession. a direct reflection of forced sales and banks withdraw from or sell businesses As yet, the consensus seems to be that reduced valuations. In the U.K. and that don’t provide a sufficient return there will be an economic slowdown Australia, more complex factors are on capital or whose earnings are too over the forthcoming year or so, but no at work; but the significant tightening volatile to support within a tight serious contraction. However, the debt- of credit is clearly having both a direct capital range. Banks need this capital financed consumer boom is effectively impact on buyers’ ability to raise otherwise they will find themselves over. 2008 looks like being a rocky ride finance and an indirect one on unable to grow their lending books. in a number of respects. consumer confidence generally. In Australia, one response to capital In Australia, banks have raised management issues is to establish a interest rates independently of the non-bank holding company so as to For more information please contact: Reserve Bank in response to higher separate banking from non-banking Simon Walker Partner funding costs in both the wholesale and businesses and apply appropriate capital KPMG in the U.K. retail markets. Interest rate increases levels for each set of business activities. Tel: +44 113 231 3328 are unexpected by many however, the Non-bank lenders have flourished in an e-Mail: [email protected] economy as a whole remains buoyant environment where funding has been as commodity prices continue to be cheap and plentiful. Non-bank lenders Peter Russell Partner are now faced with significant strong. Australian lenders have been hit KPMG in Australia by higher local funding costs as spreads challenges to their business model. Tel: +61 2 9335 7731 have widened and as global sources of Securing funding will be the top of e-Mail: [email protected]

There are still massive uncertainties in the U.S., where the credit crunch began, about the scale and timing of future impacts, and whether or not a full-scale recession is looming – or has even begun. It is clear that 2008 will not be an easy ride. Quite how bad it will get, and for how long, is difficult to predict. But as Tony Anzevino and Brian Stephens report from the front line, market sentiment is very bearish. The U.S. perspective

t the U.S. sub-prime mortgage So there are obviously difficult market, the origin of the current times ahead. In some parts of the U.S., crisis, the indicators are not looking the downturn in the housing market is promising. The vintage curves on already more severe than experienced reported delinquencies and losses in the 1990s. Consumer spending and continue to rise as home-owners confidence are suffering. Whether a Irun into repayment difficulties. As yet, full-blown recession can be avoided the trend shows no sign of flattening is debatable: the former Chairman of off. It is entirely unclear how long it the Federal Reserve, Alan Greenspan, will take for the peak to be reached, said in January 2008 that he believed and then how long it will be before a recession was looming1. More the market returns to something pessimistic commentators believe approaching normal. If the peak that it may already have begun. represents the flushing out of all In a desperate attempt to stave historical high-risk lending, then driven by the availability of cheap credit. off an even deeper crisis, the Federal recovery could come reasonably quickly. The correction here is going to be much Reserve cut interest rates by 75 basis But equally, it may be a long, drawn-out more severe. To the extent that it is points on January 22, the biggest cut for process, prolonging the misery. correlated with increased over 25 years. The Bush administration There will inevitably be a large number unemployment, it will be even worse. has promised additional emergency of distressed home buyers still to come The process of correction will economic measures to stimulate the through the system. The volume and necessarily take a long time. From initial economy, worth at least 1percent the timing of their emergence will be default through repossession to final of gross domestic product, or about the principal determinant of how long sale of a property can take up to a year, US$145bn2. Will it be enough? At the and how severe the housing market as the various legal procedures are time of writing, we can only hope so. crisis will be. But there could also be negotiated. That means that defaults secondary effects. If the employment being reported now will be continuing market continues to weaken, it could to hang over the market for at least the For more information please contact: have a knock-on impact on the housing rest of 2008, depressing values Tony Anzevino Partner market, depressing values and driving throughout the year. This excess KPMG in the U.S. yet more borrowers into default. housing supply will be mitigated Tel: +1 212 872 6270 A significant complication is that somewhat by the already dramatic e-Mail: [email protected] the housing market is very different in reduction in new housing. Nor is it clear different parts of the country. Individual how strongly the housing market will Brian Stephens Partner recover. With an ageing population, states – and even individual Metropolitan KPMG in the U.S. Statistical Areas – experienced very and the baby boomers now tending Tel: +1 312 665 2827 contrasting conditions during the house to downsize rather than trade up, there e-Mail: [email protected] price boom of recent years. A state such is likely to be a long-term structural as Wisconsin, with its industrial and weakening of the market exacerbating manufacturing character and relatively the impact of the immediate crisis. high employment, has seen only modest Some lenders are now beginning to inflation in house prices. The impact here consider whether foreclosing on such is likely to be fairly benign. By contrast, a large volume of properties is the best 1. Wall Street Journal Jan 15 2008 states such as Florida and Southern course, given the detrimental impact on See: http://online.wsj.com/article/SB120036887435090605.html

California saw extensive price rises, the value of their other housing assets. 2. BBC Jan 22 2008: http://news.bbc.co.uk/1/hi/business/7202645.stm

The introduction of Economic Capital allowed banks to take a major step forward in assessing risk and managing the value of their business, moving away from earlier ‘one size fits all’ approaches based on regulatory capital. But big doubts remain about its true effectiveness in practice, and it certainly hasn’t safeguarded the banking industry from the current crisis in the sub-prime market. So can Economic Capital still be trusted to support business decisions? Yes, say Daniel Sommer and Holger Spielberg – as long as practitioners keep challenging their thinking. Economic Capital Paper tiger, dead duck, or still alive and kicking?

conomic Capital is perspective, doesn’t always give considered a key the right incentives for management, component in the and does not in itself provide a management of risk, sufficient early warning system profitability and therefore of critical losses. value. Use of Economic Ironically, it is the biggest players ECapital in value management allows in the banking world – who have been banks to take risk into account in a perceived as front-runners in applying much more tailored and individual way, Economic Capital management helping them (in theory at least) to approaches – that have tended to suffer eliminate the ‘measurement arbitrage’ most in recent crises. What is behind inherent in the old regulatory capital this apparent paradox? Has Economic approach. But despite its obvious Capital proved a paper tiger, too weak advantages, many are vocally critical. to deliver on its promises – to help Economic Capital, they say, places banking institutions deliver value for too much emphasis on rare events, shareholders? And what lessons can focuses entirely on the debtholder’s we learn from recent events?

Evaluating risk is not a mechanical exercise; it is not a matter of crunching numbers through a machine and blindly believing the results. Evaluating risk should be an ongoing and challenging qualitative exercise.

Where does Economic Capital Loss data for sub-prime loans exposure. At one time, it was hardly fall down? mostly distributed to investors via conceivable that those liquidity lines It is clear that Economic Capital concepts CDO structures – and the resulting would ever be drawn. In our current have some inherent weaknesses, which bad quality of the loan process market situation, there is hardly any make them vulnerable to (conscious or Correlation data on defaults by liquidity line that has not been drawn. unconscious) exploitation or misuse. different obligors, and how this These include: changes in different market What lessons can be learnt? environments (e.g. in the case of an All of this raises big questions for Event risk – very rare events escape interest rate rise). Correlations are a managers. Economic Capital does have 1the net key driver of Probability of Default (PD) some serious failings. But with no better and Loss Given Default (LGD) in loan alternative available at present, and the Most Economic Capital models are value portfolio tranches. But correlation is Pillar 2 regulators due to visit banks in the at-risk (VAR) based. While they typically notoriously difficult to measure based second half of 2008 to review their latest operate at high confidence levels of 99.93 on historical time series, and investors models, how can we make the best of it? percent – 99.97 percent, they do not into CDOs do not generally have the Below are some pragmatic ways to breathe capture losses from very rare events, means, material or methodology to life into your Economic Capital approach. independent from the amount of measure the amount of dependence associated losses. The losses we are risk to which they are exposing Place much more emphasis on currently seeing in the sub-prime themselves. Bank-wide measurement scenario analysis and stress testing. Collateralized Debt Obligation (CDO) systems are not sufficiently sensitive Permanently challenge – using markets (which on paper were originally to provide a proper measure. qualitative analysis and common rated AAA) are one example of such a rare sense – the output from your event, and so was the drawing of liquidity Risk category – interdependencies statistical models, based on historical lines provided to SIVs holding this paper. 3may not be captured data. Adapt models, or restrict their These events fell outside of the range of use in the event of significant probable losses which Economic Capital No model covers all risk categories to the differences in the outcome of provides for. same extent, and some are typically not the analysis. covered at all.Very often,interdependencies Holistically analyse the various New risks – not enough between categories are not fully captured business models your bank operates: 2 historical data quantitatively, mostly due to lack of – What are the main revenue drivers? historical data. So in many cases, risks may – What are the potential cost drivers? Risk models typically rely on historical data go undiscovered for a long time until they – Under what circumstances would to measure risk. But in the case of new suddenly strike. This is certainly the case the business model break down risks, there is no appropriate historical data for SIVs and conduits, which were treated or collapse? to feed the models, and standard bank- as a much lower risk than on-balance-sheet – What Economic Capital would the wide models may be too coarse to capture exposures until suddenly – through the market require the bank to hold in the true risk of a new business. Recent drawing of liquidity lines or consolidation order to operate the business model, cases in point include: – they turned into on-balance-sheet given full transparency?

frontiers in finance – March 2008 | Topics

Figure 1 Aligning an institution’s overall risk profile to its risk appetite requires balancing different stakeholders’ perspectives and adjusting key steering processes

Shareholder / Board Focus Risk Appetite Statement • Main concern: ‘Is anticipated Earnings at Risk’ (EaR) capacity earnings volatility acceptable?’ Self-sustaining growth • Dividend cut / profit warning = 1 in Probability Concentration limits 5 – 10 years event Target debt rating • Focus on risk measures that capture volatility around expected Target capital ratios outcomes, such as Earnings at Various other criteria, such as Risk ‘acceptable’ vs. ‘unacceptable’ risks

Debtholder / Regulator Focus Negative signal to markets – e.g. profit warning • Main concern: ‘Can the bank survive anticipated earnings volatility?’ Poor performance – e.g. dividends rreducedeeduced duced • Insolvency = 1 in 2000+ years • Focus on risk measures that SeniorSenior management ‘reshuffled’ capture extreme loss events – Economic Capital RegulatoryRRegulategulatoryory takeover

CapitalCapital base lost Expected Earnings

Source: KPMG International, 2008

Our recommendation is simple: keep challenging yourself. Poke holes in your model. Ask yourself: What assumptions have I made?

No restriction of significant risk As well as measuring capital, you models, so that they can be truly effective Source:categories, ?????????? parts of business models, also need to manage capital actively. when they are used to support business or other silos are allowed. This could You need the right instruments in decision- making. help capture more risks – in particular place to manage your business Our recommendation is simple: keep interdependencies between relative to your capital base. Your challenging yourself. Poke holes in your risk drivers. scenario analyses must relate to, and model. Ask yourself: What assumptions Integrate the perspective of other reflect, the complete capital picture, have I made? If they’re wrong, what stakeholders into the Economic including not just Economic Capital would happen to my business? Focus on Capital concept: but regulatory, rating agency and understanding your business model: what – The current approach focuses on the book capital. This assessment will makes it work? What drives profits and debtholder perspective and the bank’s of course be different for every losses? Devote proportionally more time default probability bank, and it may be tough to apply to developing new scenarios. Make sure – A more balanced view would include a number to it: but that is exactly you have a process to attach numbers to a going concern perspective (including what Pillar 2 of Basel II is calling for, those scenarios, relate the numbers back the likelihood of wipe-out of profits, with bank-wide stress testing. to your risk bearing capacity – and act and loss of equity triggering on what you find. As long as practitioners a recapitalization) Economic Capital is still alive – are exercising true economic thinking – This approach would also capture just keep challenging in this way, Economic Capital still has the breakdown of single business Despite the fact that Economic Capital may a chance to be meaningful and helpful. models – and the events we currently not be a panacea in bank management, see in the market KPMG member firms still believe in its For more information please contact: Risk measurement is just one side usefulness. However, banks need to make Daniel Sommer Partner of the story: it has to be related to sure they are really exercising the freedom KPMG in Germany management action. This may result which the concept allows them. Evaluating Tel: +49 69 9587 2498 in a decision to walk away from risk is not a mechanical exercise; it is not a e-Mail: [email protected] unacceptably risky business; or you matter of crunching numbers through a may decide to change or add to your machine and blindly believing the results. Holger Spielberg Director business model to avoid relying on Evaluating risk should be an ongoing and KPMG in Germany a certain source of revenue with challenging qualitative exercise, geared to Tel: +49 89 9282 4870 unacceptable risks. improving and calibrating your statistical e-Mail: [email protected]

Branch effectiveness Delivering a high performing sales culture

The branch remains an important growth channel for retail banking. Yet sales performance remains extremely variable across networks and too often sales targets are not being met. Mark Longworth and Hugh O’Reilly have shown that a set of practical steps can deliver a step change in sales performance and a shift towards a sustainable high performing sales culture.

However, dynamic sales environments booked etc.) backed up by clear alone do not generate dynamic sales and effective rewards and incentives results. In many cases, performance (calibrated across the different seller continues to vary considerably from and teller communities). Clear and branch to branch across a network; consistent communication of objectives, decade ago, retail and as a result, too often branch scorecards and performance, supported banking commentators channel sales targets are not being met. by sustained personal development, were confidently There is much more work still to do to need to be applied consistently right predicting the demise drive the business and cultural transition across the network and at all levels of the branch as from branches as service-focused cost of management to ensure effective customers moved to centers to income generating, high coaching and development AInternet and telephone banking. In the performance sales centers – and to do interventions are made to improve event, despite the expected surge in it consistently throughout the network. performance at the point of need – the use of these remote channels, the As with all such major change not at the end of the month. A branch branch is still very much with us. The programs, to reach the goal requires can sometimes work as a series of numbers of customers visiting branches simultaneous action on a number of discrete units, whereas to be most in 2006 in the U.K. was only slightly fronts – from systems and processes, effective it needs to work – and be down on 2000 levels, and for retail to the physical branch environment, to managed – as an integrated team. banks, branches continue to be seen the skills and behaviors of branch staff. as a key channel for business growth. There is no single, silver bullet solution. Designing an end-to-end In today’s market, with margins All these change activities have to be 2 sales process narrowing and the cost of acquiring delivered faultlessly if the anticipated new customers proving prohibitive, benefits are to be secured. Customers, and as a result individual the pressure is on for banks to leverage Working with a range of retail banks sales, are all different. But having a clear existing relationships, to sell more KPMG member firms have identified design for the ‘ultimate’ sales process products to existing customers and to eight key principles that can help to can help to ensure that each member ensure that all sales opportunities are deliver a high performing sales culture of the branch team can understand their optimized. Not surprisingly, banks are consistently across a branch network: role and responsibility within the sales keen to capture the sales opportunities value chain. In this context, the sale offered by branches in particular, where Effective sales force and process is never just the traditional face-to-face interaction provides an 1staff management process flow (which is essential), but unparalleled chance to build personal the complex set of rules and models relationships with customers, to Ultimately, the performance of a branch that choreograph how counter staff, understand their needs, and to is driven by the way the staff in it are customer advisors, branch greeters etc. convey key sales messages. Far from managed, and in particular whether the interact with and support customers – seeking to close branches or make management process is designed to and each other – throughout the sales them smaller, banks have begun deliver the desired sales behaviors. This process. It covers sales models and investing in refurbishing and relocating means tight performance management techniques, effective work patterns their branches, extending their based on appropriate targets (for both and system-aided tools that support the networks, recalibrating their branch outputs, like sales, and inputs, like calls optimal generation of leads and result locations to align to customer behavior made, leads generated, appointments in the optimal level of conversions. and improving their customer management systems. Retail banks need branches to be places where customers can conduct their transactions quickly, but in an environment that encourages interaction with empathetic staff and optimizes opportunities to generate and manage sales leads. As a result, there is a considerable appetite to get the branch estate ‘right’, especially in terms of a consistent look and feel. The old ‘banking halls’ are gradually being replaced by the type of open plan, dynamic sales environments more normally found in sophisticated retail operations.

branch. On the other, banks need to make customers aware of the benefits of their products. Empathetic staff and In many cases, performance continues to vary slick processes are essential to customer considerably from branch to branch across a satisfaction and banks are continuing network; and as a result, too often branch channel to review their basic processes to ensure they are efficient, effective sales targets are not being met. and customer-centric. The priorities are those interactions that involve high levels of customer emotion, e.g. complaints, account opening, Developing the skills of the Capacity and traffic management dealing with the families of deceased 3 sales force 5 customers. The practical rules are to be understanding, take ownership, Increasing regulatory pressure has This goes beyond minimizing customer be clear, and deliver on promises. led to a situation where most of the waiting times through queue handling, management attention on sellers is ATM locations etc. Banks need to Incentives and reward structures about ensuring they are following a adopt high street strategies, where 8 compliant process, rather than careful consideration is given to how developing and coaching appropriate customers move around a store so that Incentive and reward structures in sales skills. Individual sellers should sales opportunities are maximized. A lot branch environments usually require a be viewed as individual profit centers. of focus is now on ensuring that each master’s degree in applied mathematics Continuous development, coaching and branch understands its customer flow, to understand. The most effective improvement processes need to be in identifies its hot spots and has the right incentive and reward schemes are place to ensure counter and sales staff number of sales and counter staff to simple and easy to grasp, so progress are effectively equipped to identify and react effectively to customer demand. against targets can be readily monitored. sell to a customer’s needs, deal with Manufacturing systems and techniques It is also essential they are designed to objection handling effectively, are increasingly being used in branch deliver the desired behavior. They should understand all aspects of the product capacity management to balance not just be about encouraging volume of offering and are supported by effective resource with projected workload. sales, but also about ensuring regulatory customer value propositions. alignment and selling those products Branch accessibility that deliver most value. Delivering consistency across the 6 4 whole network Banks face an urgent need to sweep While online and telephone channels away the legacy culture. But this means All banks struggle with ensuring are important for customers who want much more than introducing better consistency of approach across regions to conduct transactions remotely, most CRM systems or redesigning branch and branches. This is not just a branding profitable customers still visit their environments. It means driving the issue about look and feel, but about the branch regularly. As a result, location sales focus through to a bank’s people, way branches are managed and and convenience continue to play an core processes and business culture. processes deployed, and how staff important part in customer advocacy. These are the areas that can really interact with customers. The real Despite this, aspects such as opening make a difference. And the good news challenge for banks is not just to design hours are often not aligned to changing for banks is that, unlike IT systems, the ideal sales process, but to ensure customer behaviors or branch they do not require a massive consistent use of the proven most objectives. Banks are only slowly investment – just a lot of hard work, successful approach across a disparate beginning to develop the approaches effort and determination. branch network. The recent adoption retailers adopted many years ago to by banks of a range of inventive and make it easy for customers with busy effective ways of assuring consistency day jobs to speak to a banking adviser. For more information please contact: has helped drive improvement not just Mark Longworth Director in sales conversion rates, but also in Customer service/advocacy KPMG in the U.K. efficiency and customer satisfaction. 7 Tel: +44 113 231 3311 As always, this is not about constraining e-Mail: [email protected] the already high performing sellers, Branch staff have to achieve a careful but supporting the lower performing balance between sales and service. Hugh O’Reilly Director members of the sales teams. On the one hand, most bank customers KPMG in the U.K. do not want to be subject to aggressive Tel: +44 113 231 3205 selling pitches every time they visit their e-Mail: hugh.o’[email protected]

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ith the race to operational efficiency made possible by advances in technology, there In the current market environment, banks face a major Wis a temptation for organizations to look challenge in growing revenue profitably. The answer, inwardly at sources of value and to see their competitive edge lying, for example, argues Martin Blake, is less about operational excellence, in being the lowest cost provider. and more about truly understanding the value brought by Organizations traditionally orient their customers – individually and as segments – and coming operating model around products, with up with carefully targeted value propositions. business lines or divisions having clear accountability for their own P&Ls. By focusing on managing costs and profitability within product business units, banks have been able to significantly reduce their cost to income ratios. This has been achieved by embedding measures of efficiency into business lines, making managers accountable for performance of their domains, and then relentlessly driving unnecessary costs out of the business. Many banks claim to be customer- focused and have made large

investments in Customer Relationship boundaries. As a result, the organization A different way of thinking Management (CRM) systems; but is vulnerable to high rates of customer Some of the world’s top performing the way they are managed means attrition, as competitors swoop in with banks have answered these questions that their CRM tools are underutilized new products and offers, capitalizing on by adopting a customer-centric operating in generating real insights to help low levels of customer satisfaction and model that combines high efficiency anticipate customer needs and poor differentiation. While executives with close customer relationships. understand customer profitability. may recognize the problem, they have These organizations are leveraging their Despite the rhetoric about being tended to see it as a necessary trade-off technological investments, combined customer-focused, banks with product- in the pursuit of operational efficiency. with a culture of relentlessly pursuing centric operating models tend to leave Yet the goals of operational efficiency customer value, to deliver differentiated customers out of the picture. However and customer-focus are not mutually service to customers and high customer-focused front-line staff may exclusive – they are complementary. performance to shareholders. be, the back-room organization and Success hinges on adopting a different A research by KPMG in Australia supporting technology is often simply way of thinking, and having a customer- found that truly customer-centric not aligned to assist them in providing focus embedded in the cultural ‘DNA’ companies think of and manage differentiated customer service. of the organization. Some of the key themselves in a fundamentally new and Despite the product line structure questions facing executive teams today, different way. They deeply understand appearing clear and appropriate as the effects of the credit crunch the profitability not only of products and internally, customers often need to unfold, are: How to grow customer business lines, but also of individual engage and transact across revenue profitably in an environment in customers, both present and potential organizational boundaries. One division’s which the overall market outlook is flat? value. They make extensive use of most valued customer is another’s How to build value propositions for customer and market data and are occasional purchaser; but the customer customer segments within the current obsessive about identifying emerging views their experience in totality. A poor product/business line structure? And trends and opportunities, and use this experience with one division ripples how to achieve this without reducing insight to guide management and dissatisfaction across organizational operational efficiency? investment decisions.

They consider themselves as a Figure 1 Best practice: three layers of organization and behavior portfolio of customers; a mix of highly profitable customers providing today’s Customer-centric contact centre, customer facing staff profits, and those with calculated Customer Contact Layer have complete picture of customer relationship, supported by technology that provides predictive prompts. potential for growth. They also know how to successfully divest themselves Not particularly resource intensive but is an important of unprofitable customers with poor Market Management Layer nerve centre as it synthesises customer data to generate prospects for improvement, and have real insights into customer segments. highly accurate and timely models for Where individual products and product families are differentiating between the two. Product Management Layer developed and managed for profit in response to Their detailed understanding of customer demand. customer needs within different customer segments allows them to Source: KPMG International, 2008 develop targeted value propositions that competitors cannot match. These are Figure 2 Trade-off between customer centricity and operational excellence used both to build loyalty among their most valued customers, and to target Degree of Customer Centricity Degree of Customer Centricity Low High those high-value customers of Low High competitors who may be feeling underappreciated. Hard Customer Structure Customer-centric organization They achieve all this by defining Hard Customer accountability for customer segment Structure Matrix Structure Compelling segment Customer Centric profitability and growth, with executive- Product & customer-centric value propositions organisation level support for segment managers organization Clear ownership Matrix Structure of the Customer Product & Customer and teams working across product and Customer data is key Focus on both Centric organisation business-lines to develop products and Hard Product Structure Compelling segment Product-centric organization customer segment and Hard Product services for most-valued customers. product profitability Structure value propositions Product centric Clear ownership They practice customer innovation, invest Focus on both customer Automation & Efficiency organisation of the Customer according to the current and potential Degree of centralization resources Lowest Unit Cost segment and product Customer data is key value of customers, and respond quickly No accoutability for profitability customer segments and flexibly to market dynamics. Focus on product profitability Automation & Efficiency Fidelity Investments High Lowest Unit Cost ING Direct

Finally, customer-centric companies Degree of centralisation resources No accoutability for TD Canada Trust continue to evolve their customer Royal Bank of Canada segments by continual insight into Source: KPMG International, 2008 customer segments Focus on product profitability market changes and emerging opportunities. Segments are created, High Figure 3 Transformation to customer centricity merged and redefined as necessary to

maintain clear customer focus. But they • Tracking product P&L • Tracking product P&L never take their eye off the cost-of • Product development • Customer needs assessment • Developing product strategy • Developing customer value • Tracking product P&L • Tracking product P&L service ball. Customers and segments • Calculating product net present value propositions • Product development • Customer needs assessment • Product sales Strategy • Calculating customer net present that do not meet their portfolio and • Developing product strategy • Developing customer value propositions • Managing product life cycle value TECHNICAL growth aspirations are continually pruned. • Relationship management • Calculating product net present value • Calculating customer net present value • Managing customer life cycle • Product sales • Relationship management More about function than form • Managing product life cycle • Managing customer life cycle • Strategy driven by product • Strategy driven by customer True customer-centricity is more about organization segment CEOs function than form, and rather than • Products and territories are • Customer segments are dominant dominant in resource organization in resource allocation • Strategy driven by product organisation • Strategy driven by customer segment CEO’s fundamentally altering structure, we • Functions heads or unit heads are Organization • Best-performing customer segment • Products and territories are dominant in • Customer segments are dominant in observe three layers of organization and best compensated heads are the best compensated resource organisation resource allocation • Incentives reward produce profitability • Incentives reward customer • Functions heads or unit heads are best ORGANISATION • Best-performing customer segment heads behavior that we believe are effectively profitability accommodated together in the best compensated are the best compensated • Incentives reward product profitability • Incentives reward customer profitability performers (see Figure 1): • Products matter most • Customer experiences matter most Customer-centric organizations • Internal efficiency leads to success • Engaging customers leads to success • Product data is key • Customer data is key manage these three layers together by • Employees want to be functional • Employees want to be on teams that Culture • Products matter most • Customer experiences matter most overlaying customer segments, defined or product innovation stars win with customers • Internal efficiency leads to success • Engaging customers leads to success • All customers are created equal • High-profit and high-potential through insights into shared needs, customers deserve a superior • Product data is key • Customer data is key across the company’s lines of business, experience • Employees want to be functional or product CULTURE • Employees want to be on teams that win and managing customers’ profitability innovation stars with customers Source: KPMG International, 2008 • All customers are created equal • High-profit and high-potential customers through segment management. deserve a superior experience

Adopting a customer-centric operating model allows even the most established organizations to develop a degree of nimbleness that belies their footprint.

The degree to which these three result, customer data and managing layers are tightly or loosely integrated the customer experience is king. Who’s doing it? in an optimal operating model appears Customer-centric organizations also to involve balancing two dimensions: appreciate the importance of iterative Over the last four years, a major degree of centralization of resources testing of value propositions, and the Canadian bank has evolved its and degree of customer-centricity. This implication that not all value Personal and Commercial division to a customer-centric operating model, is because there are trade-offs between propositions will hit the mark. while retaining its product-centered customer-centricity and operational Addressing the cultural challenges organizational structure. excellence. For example, in a ‘hard that this creates is key to ensuring Beginning in 2004, the CEO customer structure’ in which staff are the right balance between risk taking introduced a ‘Client First’ strategy organized in customer segment groups, and investment diligence. that committed the organization to re-orientate its culture and systems some functions, such as marketing, around the customer experience, starting may be duplicated, which naturally Thinking like a retailer with the executive team. Subsequently: drives up costs. Each organization has Elsewhere in this issue, articles reflect to decide its optimal position based on on the need for retail banks to behave – the customer-centered structure was overlaid on top of the product their market positioning, brand promise, more like retailers. Nowhere is this centered organization. business economics and organizational more apparent than in the move by – product managers retain culture (see Figure 2): today’s highest performing banks responsibility for product P&L. towards a customer-centric model. – segment managers have primary Transformation to customer centricity They believe that growth can only responsibility for strategy and the profit and loss of their customer The transformation to a customer- come from understanding every aspect segment. Yet they must still use the centric operating model takes place of their customers – their profitability, bank’s shared functions – back office along three dimensions: strategy, needs and wants – and then taking processes, sales and marketing – organization and culture (see Figure 3): action to adjust their customer portfolio in common. Customer-centric organizations put in and value propositions. Today’s – the segment and product managers are jointly responsible for P&L, which place a process for regularly refreshing uncertain economic climate only seems works well; principally due to the fact customer value propositions based on to reinforce the importance of such that the ‘soft’ organizational factors – reassessments of customer needs. a strategy for sustained business culture and leadership – are strong. Like the innovation processes used success. Adopting a customer-centric – economic profitability for every one in industry, there is strong discipline operating model allows even the most of its customers is calculated monthly to understand where to improve in market testing ideas as they develop, established organizations to develop a value propositions for existing so that only the strongest survive. degree of nimbleness that belies their customers and identify customers Their market strategy is driven footprint, exploiting opportunities ahead they should try to acquire. by customer segment heads, who of rivals and continually sifting and – segmentation, largely on a life-cycle consequently have a key role in refining their portfolio of customers basis, allows a smooth transition of customers from the young (and not resource allocation. This represents to maintain the edge in profitability very profitable) segments to the older a significant – and challenging – shift and long-term potential. (and far more profitable) segments. of power away from product lines. Culturally, the back-room organization and thinking are aligned with the For more information please contact: customer focus of the front-line. Martin Blake Partner Everyone from the top down recognizes KPMG in Australia that success comes from winning and Tel: +61 2 9335 8316 retaining high-value customers. As a e-Mail: [email protected]

New mobile payment technologies have the potential to play a key role in the expansion of commerce to an ever-wider segment of the world’s population, especially in Asia Pacific. But amidst the current diversity of mobile payments systems, key issues of trust, security and affordability still have to be overcome if widespread adoption is to be achieved. Mobile payments in Asia Pacific

he expansion of commerce m-payment systems, and they are now Main types of mobile payment and the growing reach of collaborating to trial a range of services, Five main types of mobile payments globalization are being driven including: m-banking; m-wallet solutions can be identified as being used in by two significant factors. that store credit or debit card Asia Pacific, each with different First, the rapid adoption information on a SIM chip; pay-as-you business drivers: of mobile and wireless go or ‘contactless card’ technologies; Ttechnologies, most notably in emerging and text messaging systems that can Business-to-consumer (B2C) – allowing markets such as China and India. And facilitate or enable payments. consumers to use their handsets to pay second, the availability and evolution While banks are starting to explore for everything from groceries and lottery of micro-finance, particularly to support opportunities in m-banking, other tickets to insurance premiums and tax bills. rural or underdeveloped communities. sectors are also embracing these Business-to-business (B2B) – driven Mobile payment (m-payment) new technologies: by telecommunications fixed-mobile systems – where payments are made convergence, these m-transactions are using mobile handsets and other Transportation companies are mainly supplementing existing transaction devices, either to purchase directly offering ‘touch and pay’ access to processes and tend to be about facilitating or to authorize payment for goods and ticket barriers where a stored-value business processes like logistics, rather services – can facilitate both these card is either attached to the than end-payment. trends, and such devices are playing handset, or embedded in the SIM. Consumer-to-consumer (C2C) – these an increasing and evolving role in the Retailers are offering loyalty cards, occur directly between end-customers, wider development of electronic using similar means of payment, as but across a dedicated business platform. payment systems around Asia Pacific. they seek to reduce the amount of PayPal and eBay are well-known global Across a wide range of commercial cash they have to handle and carry. platforms, but locally, an increasing sectors, from the mobile network Credit card companies see mobile number of new players are springing up, operators (MNOs) and the handset handsets as a means to widen such as Alibaba’s Alipay in China. manufacturers, to transportation their catchments of Person-to-person (P2P) – these private companies and payment platform commercial transactions. transactions between two individuals are providers, to banks and retail stores, Advertisers are building web-links primarily SMS-based. For example, to advertisers and third party content into posters in trains and buses and payments for transactions in gaming and providers, there is a growing investment on buildings which can be activated virtual world participation across Asia are in m-payments as a way to reach and by 3G+ phones from a short distance already switching to mobile as it is often retain new customers, to generate leading to more website visits and seen to be more secure than paying more traffic, and to reduce cash more purchases by mobile phone. from a computer. Peer-to-peer lending payments and transaction costs. Vending machine operators sell soft models have also been springing up on MNOs have played an important role drinks and other consumables by this basis, led by the likes of Zopa (U.K.), in pushing the technology necessary enabling payment by phone. Prosper (U.S.), Smeva (Germany) and for m-payments. More recently, major Content providers, including music Boober (Denmark). A similar service, advances in technology, especially in and information sites, auction sites PPdai, was recently established in China. the ‘secure element’ aspect of SIM and rapidly growing Web 2.0 Remittance mobile payments – this is cards, have made financial institutions community sites such as MySpace effectively a one-way P2P transaction. in particular feel more comfortable and YouTube, are becoming globally Examples include a parent using their about the potential for adoption of accessible to paying customers. mobile to remit a taxi fare to their child

across the city or a domestic worker in considerable bank interest in using For more information please contact: Hong Kong sending their monthly wages m-payments instead of ATM and other Anson Bailey to their family in the Philippines. The capital intensive networks, which holds Partner KPMG in China phenomenal uptake of this model in out the potential for significant growth. Tel: +852 2978 8969 countries like the Philippines has caught Thailand, Malaysia, and potentially e-Mail: [email protected] the industry by surprise. Vietnam, appear to fall somewhere in the middle, with strong adoption in a David Collins Country by country variations few areas such as top-up and gaming, Partner KPMG in China A variety of quite distinct patterns but less extensive use in the more Tel: +852 2826 7204 of adoption can be seen in different traditional areas of m-banking. e-Mail: [email protected] markets around the ASPAC region. The main economies – Japan and Many, diverse m-payment systems Dr. John Ure Korea – are widely acknowledged as A key point that emerges from the Asia Director TRPC global leaders in the adoption of digital Pacific research is the current diversity e-Mail: [email protected] technologies, and this is also true in of m-payment systems, which involve m-payments. But their stories are very different stakeholders (MNO-centric, Dr. Peter Lovelock different. Japan has seen significant bank-centric, vendor-centric, payments Director penetration in the use of 3G services platform-centric, etc.), different TRPC e-Mail: [email protected] to create an ‘m-wallet’ inside the mobile business models (B2B, B2C, C2C, phone, with some 25 million m-wallet and one-way and two-way P2P), and phones having been sold. In Korea, due significant variations between countries. to distrust between carriers and banks Understanding this diversity and the and fragmented hardware offerings, the market opportunities it gives rise to market has up to now been driven by is a key to wise business investment. payment gateway providers. But more Ultimately, the widespread adoption recently, the carriers and finance of the full range of m-payment systems companies have begun relaunching will be driven by consumer confidence. their m-payment services and their This means telecoms companies, performance is being keenly watched financial institutions and software and around the region because Korea is content providers will have to work traditionally the region’s test-bed for closely together to understand each new mobile technologies. other’s processes and security. If the Somewhat surprisingly, the most issues of trust, security and affordability mobile-penetrated territories on the can be overcome, these systems offer planet – Hong Kong, Singapore, Taipei enormous potential to give global – have shown little comparable adoption organizations access to a far wider of m-payments, except in the use of market, and to support economic contactless cards for transportation and development in remote areas. some limited retail usage. The market This article has been drawn from the following report: KPMG for m-payments is currently being driven in China and Hong Kong, Mobile payments in Asia Pacific, 2007. This mobile payments report is the first of two papers produced mainly by smartcard developments, by the Telecoms Research Project Corporate (TRPC) in collaboration with KPMG in China and Hong Kong, the second being on online in which Visa and MasterCard are games, a sector of rapid commercial growth and in which mobile payments are coming to play an increasingly important role. taking an active role. TRP Corporate is the consulting, services and training arm of the Telecommunications Research Project based at the University The very large but less-developed of Hong Kong. markets of China, India, Indonesia, and the Philippines are demonstrating rapid take-up of m-payments across a More information range of areas from remittance and bill payment to e- and m-ticketing. In both You can find more in-depth information China and India it is the third party, about this topic in the following KPMG independent gateway providers who survey report: have driven market offerings, while the MNOs and banks have been exploring payments developments. The Philippines has distinguished itself as a leader in SMS, but Indonesia’s high Please contact the KPMG authors levels of Internet credit card fraud should you wish to have constrained the development receive a hard copy of m-payment services. Nevertheless, of this report. in all these major markets there is

To date, the U.K. is the only country in Western Europe to authorize the establishment of stand alone Islamic financial institutions. In the first article of our new series on Islamic finance, Paul Furneaux and Samer Hijazi examine the opportunities – and key challenges – presented by the U.K. market. The future looks bright, they say – but there are some hurdles to cross first.

s recently as the early 1990s, Islamic banking was a foreign concept in the West. One of the world’s first Islamic banks1 was founded Ain Dubai in 1975, and Islamic banks have since gained a strong presence in countries with Muslim majorities – with a particular surge of interest in the Middle East and South-East Asia in the past five years. But outside of this territory, Islamic banking has been a relatively untapped market compared to the highly competitive conventional retail banking industry. However, with a growing volume of GCC2 investors showing interest in branching out overseas to serve Muslims living in the West, and serious encouragement from (first Chancellor, now Prime Minister) Gordon Brown, Islamic finance has recently begun to take a serious foothold in the U.K. London was obviously attractive because of its position as a world financial center – on a par with New York, Frankfurt, and Tokyo – and because of its large Muslim population. The country’s first standalone Sharia’ a-compliant bank, the Islamic Bank of Britain, opened in 2004, followed by the European Islamic Investment Bank, the Bank of London and the Middle East, and European Finance House. The establishment of their operations and infrastructure has, they hope, set the stage for major growth.

U.K. government and regulator fully supportive The U.K. government, led by the enthusiasm of Prime Minister Gordon Brown, has a vision of London as a global hub for Islamic finance, providing a full range of Sharia’a-compliant services from retail banking and insurance through to global investment banking and capital markets. The government has shown continuing commitment to provide the necessary infrastructure to achieve this goal. The country’s financial regulator, the Financial Services Authority (FSA) has proved equally helpful in resolving some of the complex regulatory issues which have arisen (see The challenges in the U.K., below). Another major supportive step was taken in 2006 with the launch of the U.K. Securities & Investment Institute’s (SII) specialist Islamic Finance Qualification (IFQ) – the first global benchmark examination covering Islamic finance. The world’s global banking players are now throwing their weight fully behind the Islamic finance industry. Investment banks including JP Morgan, Credit Suisse and Deutsche Bank are all setting up global Islamic finance desks in London with a strong focus on the GCC, while HSBC – through its Amanah operations – has been operating in this sphere for some time now. Deutsche Bank and Barclays Capital can now claim to be among the world’s top five issuers of sukuk.

How strong is potential U.K. market demand? One key target for the Islamic banks establishing in the U.K. is Britain’s two million-strong Muslim population – who may be reluctant to use established banking services because they are in conflict with Sharia’a. It seems a fair assumption that Muslims will use an Islamic bank – to finance the purchase of their homes and cars, and invest in savings and retirement plans – if there is one in their neighborhood. However, the take-up of Sharia’a-compliant U.K. retail financial services is still embryonic, for various complex reasons, so this is still a space to be watched. What could be more immediately promising is the outlook for capital markets business, with London as the hub.

It seems a fair assumption that Muslims will use an Islamic bank – to finance the purchase of their homes and cars, and invest in savings and retirement plans – if there is one in their neighborhood.

What types of financial products has been (to date) little accounting, taxation has to conform to some extent are now available? fiscal or regulatory precedent to deal with European legislation in this field, Nearly all the traditional retail banking with them on a stand-alone basis. so changes can naturally take time. services expected from established high Some of the issues KPMG member street banks – like lending, mortgages firms have experienced include: Regulatory treatment and insurance – are available in a The FSA was extremely positive about Sharia’a-compliant form. For example, Accounting the broader establishment of Islamic the Islamic Bank of Britain offers a Although Islamic financial products have finance in the U.K. Like HMRC and HM Sharia’a-compliant current account, equivalents in conventional banks, the Treasury, it wants to get the detail right mortgage and personal loan; and HSBC theory behind them can raise complex from day one, and this has led to some and Lloyds TSB offer Islamic current accounting issues and lengthy debate in complex debates. One good example accounts and home finance. A small terms of how to treat them under IFRS arose around whether customer number of other banks – including big and U.K. company law – for example, deposits under the Mudarabah model3 international players and Middle Eastern whether or not products should appear should be on or off the balance sheet. banks – also offer financial products in on the balance sheet; whether a Clearly, this has implications for the the U.K. tailored for Muslims. product should be classified as a U.K.’s deposit protection scheme. So how fast can we expect these financing product or a leasing product; In discussion with the FSA, this was products, and Islamic investments, to whether an investment should be eventually resolved, and onto the be snapped up? Islamic finance doesn’t classified as an equity investment balance sheet they went. lean naturally towards products like or a loan, and so on. In all these cases there is no derivatives and is naturally averse to shortcut to getting it right: you need products involving alcohol, gambling and Taxation advice from experienced specialists to pornography, among others. It abhors When the first stand-alone (the Islamic reach the solution. While the FSA has interest and wild speculation, while Bank of Britain) was being established proved extremely supportive, they do encouraging the productive use of prior to 2004, there was precious little not want this industry to operate in a assets and funds for the greater benefit in terms of adequate tax legislation to silo: as the regulator, they are deeply of society as a whole. Equity investment deal with Islamic financial products, and concerned that Islamic finance should funds should thus prove popular, while it took a great deal of discussion with be part of the wider financial services investment in fixed income bonds is not HMRC and HM Treasury to agree a industry, so that Muslim investors and possible, because they bear interest. basis for treatment and provide a level consumers get the same protection But sukuk, the asset-backed bonds that playing field vis-à-vis conventional and rights as their equivalent comply with Sharia’a, provide a suitable products. One of the biggest headaches conventional bank customers. equivalent. Insurance under the Islamic was the tax treatment of Islamic model may be one area ripe for further customer deposits and whether the Need for common standards to development: it is currently offered by treatment of the expense paid out on enhance global credibility only one or two mainstream providers. those deposits should be tax deductible: On a broader global level, for Islamic KPMG in the U.K. said yes, but the institutions to move forward as part of The challenges in the U.K. government said no, which would have a global industry, another key challenge So with this positive outlook, what are been disastrous for the business model. will be to harmonize accounting and the main challenges for the industry? After further lengthy debate, the financial reporting standards and other For stand-alone institutions setting up authorities finally agreed with us. New business practices. There are currently in the U.K., many recent challenges legislation introduced by the Finance no universal adopted standards of have revolved around the fact that, Act 2005 has made life easier, but there Sharia’a interpretation and compliance because many of the financial is still work to be done on other procedures. A comparison of a sample products and concepts behind them products. On the VAT side, progress of Sharia’a Board opinions from the are unfamiliar in this country, there is still being made – slowly. U.K. indirect annual accounts of institutions in the

Definitions KPMG member firms have seen stand-alone retail banks, investment banks and other Islamic Sharia’a law institutions authorized in the U.K., but we have Giving or receiving interest is forbidden yet to see a conventional Western bank convert under Islamic law: wealth over to the Islamic model. must be generated only U.K., GCC countries, Malaysia and over to the Islamic model – something through legitimate trade North Africa can reveal significant which is quite commonplace elsewhere, and investment in assets. variations in terms of the scope of particularly in the GCC. One of the next review, and whether the Boards are challenges could well be the foreign How does Islamic providing positive or negative assurance. acquisition and conversion of a small Islamic financial institutions can also U.K. bank by a Middle East Islamic finance work? take a variety of approaches in terms financial institution. Given the basic principle of the internal work they do to support Looking further afield, there are many that all forms of interest the opinion of the Sharia’a Board: some countries in the EU with larger Muslim are forbidden, the Islamic banks use their Internal Audit team to minorities than the U.K., who have no carry out testing, some use an internal immediate access to Islamic finance. financial model works on Sharia’a review department – some use Another substantial challenge could be the basis of risk sharing. a combination of both. But the fact is, the rollout of the U.K.’s Islamic finance The customer and the consumers cannot point to a common experience to other countries – through bank share the risk of any standard as a proof of substantiation. the establishment of branches and Some progress has been made and operations in countries such as France, investment on agreed a framework does exist. The Accounting Germany and Holland – to serve their terms, and divide any and Auditing Organization for Islamic Muslim minorities. profits between them. Financial Institutions (AAOIFI), based Source: www.hsbcamanah.com in Bahrain, has created a set of Islamic accounting and auditing standards, and For more information please contact: produced a proforma Sharia’a review Paul Furneaux Partner opinion. But with Islamic banking spread KPMG in the U.K. across the Middle East, South East Asia Tel: +44 20 7694 2624 and the U.K., it is hard to secure a cross- e-Mail: [email protected] industry commitment to common implementation. Harmonization in this Samer Hijazi Senior Manager area is a decision the wider industry KPMG in the U.K. needs to consider. Tel: +44 20 7694 2807 e-Mail: [email protected] Challenges to come 1. The Dubai Islamic Bank KPMG member firms have seen stand 2. Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, alone retail banks, investment banks Saudi Arabia and United Arab Emirates and other Islamic institutions authorized 3. Mudarabah: an investment partnership, whereby the investor (typically the Islamic bank’s customer) provides capital to another in the U.K., but we have yet to see party/entrepreneur (the Islamic bank) in order to undertake a business/investment activity. While profits are shared on a a conventional Western bank convert pre-agreed ratio, loss of investment is born by the investor only

Stocks, bonds and derivatives in the world’s most dynamic economy

rising China The sheer scale of the sums of money involved in China’s capital markets means that the country is already a force to be reckoned with on the world stage. The equity market, in particular, has shown enormous capital growth, and the Shanghai stock exchange is now the sixth largest in the world. China’s bond and derivatives markets are as yet less developed. Corporate financing remains overwhelmingly dependent on bank finance, and growth in financial derivatives has been controlled for fear of encouraging speculation. But structural and policy initiatives are in hand here as well which could lead to significant market opening in the near future. As the Chinese economy continues to grow, massive amounts of capital are looking for a productive home. So far, we have seen only a fraction of the eventual impact of China’s value creation and capital growth.

Here, Simon Gleave draws on a recently published report1 to outline some key developments and outstanding issues in China’s stock, bond and derivatives markets.

Looking ahead, the state share reform program should over time result in prices that more closely reflect supply and demand in the market. Reforms to corporate governance standards should also mean that companies with solid financial performance will be more reliably rewarded by the market, while poorer performers are penalized. This environment may also spur merger and The Stock Markets acquisition activity as the government reduces its holdings in publicly listed Mainland China’s share market has The smaller Shenzhen Board is enterprises. Greater foreign investment grown rapidly since the Shanghai Stock focused on smaller companies wishing could also be another result. Exchange was re-established in 1990, to raise capital but which fail to meet The regulators may one day allow along with the smaller Shenzhen Stock normal listing criteria. The exchange foreign companies to list on mainland Exchange. Total capitalization of the two has not entirely lived up to expectations: stock exchanges – a move that would topped RMB 31 trillion (US$4.3 trillion) while it has brought many smaller be well received by both foreign in November 2007, a ten-fold rise in just companies to market, it has not enrolled companies and local investors alike. 2.5 years. The Chinese government is a core of high tech start-up firms. Some Stock exchange officials have said increasingly encouraging domestic industry analysts expect China to publicly that such a plan was at least companies to list on a mainland bourse. transform Shenzhen into a NASDAQ- under consideration. If it were to occur The trend towards listing in Shanghai style second board; others contend there it would aid the regulators in their as well as or instead of Hong Kong has may be a need for an entirely new entity. efforts to improve the quality of been largely led by large state-owned But there is no shortage of companies companies listed on the exchanges. companies. To date, many private eager to join: more than 1,000 enterprises The importance of Shanghai as Chinese companies have preferred an are believed to be hoping to list. mainland China’s investment gateway overseas listing, because of the higher In order to accommodate the rapidly is likely to continue to grow establishing global profile they believe it brings, growing interest of foreign investors in mainland China as one of the dominant but this is also changing. investing in the Chinese market, the capital markets in Asia and the world. By encouraging domestic IPOs on regulators introduced the Qualified the Shanghai exchange, the government Foreign Institutional Investor (QFII) has been successful in raising the scheme (see box on page 40). A-Shares, B-Shares overall quality of listed companies, Conversely, the Qualified Domestic expanding the breadth and depth of the Institutional Investor (QDII) scheme A-shares are Renminbi-denominated shares of China-incorporated companies market and giving local investors more enables domestic institutions to invest traded on the Shanghai or Shenzhen attractive investment options. Although in overseas assets, providing an outlet exchanges. Only mainland Chinese institutional investors hold a growing for surplus Chinese capital. nationals and selected foreign proportion of listed shares, retail Constantly-growing domestic liquidity institutional investors authorized investors are currently the mainstay of is fuelling inflation in asset prices, under the Qualified Foreign Institutional Investor (QFII) system introduced in the market. Individuals hold 99.8 percent including those of shares. Recent December 2002 are able to trade in of China’s 107 million share-trading regulatory changes have focused on A-shares. accounts, conduct 9 percent of the cooling the market and curbing trading by volume and own 63.6 percent speculation. To make savings deposits B-shares are foreign currency shares of of China’s tradable shares by value. in the banking system more attractive, China-incorporated companies traded on the Shanghai or Shenzhen exchanges. taxes on bank interest income were There is massive liquidity in the They are quoted in U.S. dollars in Chinese capital market, with large reduced in 2007 from 20 percent to Shanghai and Hong Kong dollars in amounts of cash looking for a home, 5 percent. The central bank raised Shenzhen. Since March 2001, domestic and a general readiness to invest. This interest rates five times and increased retail investors have been able to trade has helped to drive up stock prices on bank reserve requirements nine times B-shares. B-shares appear to have outlived their original purpose, when the mainland exchanges: stocks on the during the year, mainly to slow overly they were reserved to foreign investors, A-share market (see box) trade at a P/E rapid economic growth but also to keep and many people expect A- and B-shares ratio of around 60, while Hong Kong’s rising share prices in check. But prices to be merged into one class of stock. is about 20. have continued to climb.

China’s continued economic expansion is expected to drive further market liberalization in derivative products over the next few years.

QFII, QDII explained… The Bond Market

The Qualified Foreign Institutional The use of bonds to finance bank said recently that a lack of Investor (QFII) program was introduced government spending and infrastructure development in this area “could result in 2002 to allow overseas investors buy projects can be traced back more than in risk accumulation in the banking into domestic equity and debt markets 100 years. They reappeared in 1981, system and threaten the stability for less speculative investments. It has well before stock markets were allowed of the financial system on one hand to date allowed more than 50 banks, securities firms and asset managers, to resume their place on the financial and on the other hand affect further including HSBC, Morgan Stanley, stage. Despite recent progress, more development of financial markets Goldman Sachs, UBS and Deutsche needs to be done to create a genuinely in terms of scope and depth.” Bank, to invest in China’s securities active bond market in China. Domestic A World Bank report last year voiced markets, with a total value to date of companies still rely more heavily similar concerns, stressing the need US$10 billion. The Qualified Domestic Institutional on bank loans for financing, thereby for China to “develop mechanisms for Investor (QDII) program was launched creating a build-up of risk in the the sharing, transfer and pricing of risk.” in April 2006 to allow approved financial banking system. The authorities have recently moved institutions in China to make About 84 percent of corporate to let more domestic companies, investments in overseas fixed income, finance comes from banks and including those listed overseas, as equities and derivatives in foreign currencies. This cleared the way for about 6 percent from equity, with the well as foreign multinationals, issue banks, fund managers and insurance bond market supplying the remaining corporate bonds. In 2007, new rules companies to invest offshore, using 10 percent. The bond market is opened the market to private sector either their own or purchased foreign dominated by government debt: companies listed on the Shanghai, exchange. The aim was twofold – to corporate issues account for less than Shenzhen or offshore stock markets, drain some domestic liquidity as well as reduce upward pressure on the strong 5 percent of the total of some RMB subject to strict controls on credit rating Renminbi by moving some of China’s 4.1 trillion (US$560 billion) of issuance and assets. Media reports have mounting foreign reserves abroad. in the first six months of 2007. The suggested that electric power So far around 50 institutions have corporate bond market looks particularly producers and other public utilities, been granted QDII licenses and quotas, small when compared to those of other as well as transport firms and real to a value of over US$ billion. major economies. In 2006, according to estate developers, have expressed figures from ChinaBond, total the most interest outstanding domestic debt securities in issuing corporate bonds. issued by corporate issuers in China These and further reforms should were equal to 2 percent of GDP, increase interest in the bond market, compared with 16.48 percent in reduce risk to the financial system, Japan and 23.9 percent in the U.S. soak up excess liquidity, provide The resultant concentration of risk investors with another alternative to in the banking system has been a major equities and help move debt financing driver behind the government’s effort to away from the state and towards the liberalize the bond market. The central private sector.

KPMG comment

Simon Gleave Partner KPMG in China The Derivatives Market

China is home to three futures exchanges Despite a limited market compared “Beijing has introduced trading key commodities including copper, to equities, warrant turnover on the major policy initiatives aluminum, rubber, wheat, fuel oil, Shanghai exchange reached RMB 2.7 which have resulted in soybeans, corn and sugar. In September trillion (US$370 billion) in the first six 2006, regulators took steps to extend months of 2007, accounting for 16 the rapid growth and futures trading into the financial arena, percent of aggregate trading volume. greater efficiency of with the inauguration of China’s first Both the Shanghai and Shenzhen China’s capital markets. financial derivatives exchange, the exchanges are now taking a tougher China has become a Shanghai-based China Financial Futures stance on speculation and irregularities Exchange (CFFEX). in the warrants market. They require global center for IPO’s The exchange is still in the formative investors to sign risk acknowledgement and the Shanghai Stock stage and has not begun trading yet. waivers with brokers before they begin Exchange has developed But in preparation for the launch of a trading as part of an effort to inform them into the sixth largest range of additional financial derivatives, about the risks and curb misconduct. regulators have introduced further rules Looking ahead China’s continued share market in the governing the supervision of futures economic expansion is expected to world. At the same time companies and exchanges, as well as drive further market liberalization in the qualified foreign the financial futures clearing system. derivative products over the next few institutional investor The CFFEX also issued trading rules, years. Product offerings may include clearing regulations and required risk more hybrid bonds, which have both program has begun controls for members – all in a bid to equity and debt characteristics. to open the door for bring greater stability to the market and Significant investor interest and excess overseas investors and reduce risk. One of the most anticipated liquidity in the Chinese economy could the qualified domestic developments has been the impending help spur futures and options trading. launch of stock index futures. The This could be given a further boost as institutional investor launch has been delayed, partly in more participants are allowed to trade program is providing response to the global ‘credit crunch’, in a wider range of securities. If the opportunities for local but regulators say groundwork is growth of derivatives in Western investors to move ‘basically’ complete and that trading countries is any indication, trading in could begin soon. Many institutional China’s derivatives market could grow capital offshore.” investors will be allowed to participate, as robustly as it has in the equity including mutual funds, brokerages and markets over the last few years. Qualified Foreign Institutional Investors (QFIIs). CFFEX may also consider More information launching index options after index For more information please contact: futures trading starts. Simon Gleave You can find more in-depth information Partner One element of the capital markets about this topic in the following KPMG KPMG in China survey report: reforms which has been successful Tel: +86 10 8508 7007 already is the warrant market. In 2005, e-Mail: [email protected] Shanghai Baosteel Group was permitted to offer warrants to public shareholders Harry Hughes Business Development Executive in compensation for its plan to list KPMG in China Please contact previously un-traded state held shares. Tel: +852 2826 7261 Harry Hughes, Since then, warrants have become e-Mail: [email protected] should you wish to another channel for listed companies receive a hard copy to raise funds as well as an additional of this report. 1. The Rise of China’s Capital Markets: A study of China’s stock, financial instrument for investors to trade. bond and derivatives markets, KPMG, November 2007

New KPMG Thought Leadership:

Forecasting with Confidence Managing Credit Risk: Beyond Basel II This research confirms the view that This white paper traces out the forecasting is now widely acknowledged opportunities for an enhanced credit to be at the heart of the performance risk management in a world of larger management process and potentially markets for credit risk transfer and a significant driver of business value more sophisticated risk measurement and investor confidence. It is based on methodologies post Basel II and presents a global survey of 544 senior executives. perspectives on value creation in the Commissioned by KPMG International, credit business post–Basel II. October 2007.

The Evolution of Risk and Controls: from Managing Economic Capital: score-keeping to strategic partnering Beyond Basel II In October 2007, KPMG International This white paper reviews the leading risk commissioned the Economist Intelligence identification, measurement, and aggregation Unit to conduct a global survey of 435 methodologies as well as internal capital senior executives to establish their views adequacy and economic capital allocation and vision for the risk and controls within across the bank as a prerequisite for risk- their organisations. adjusted decision making and presents perspectives on integrated risk and economic value management.

The Determinants of M&A Success Managing Operational Risk: In conjunction with the University of Beyond Basel II Chicago Graduate School of Business, This publication considers the lessons KPMG’s global advisory practice did a learned from the operational risk statistical analysis to determine how various management investments made, the deal factors are correlated with deal opportunities that resulted, and the success over a twelve and twenty-four experience gained from the regulatory month period after the announcement approval process and proposes an approach of the deal. to aligning operational risk management with performance management

Restore Magazine Quantifying Uncertainty This magazine aims to provide regular in Technical Reserves intelligence and opinions on restructuring The white paper entitled: ‘Quantifying issues from professionals in the market Uncertainty in Technical Reserves’ place. This edition focuses on the potential discusses the pressures facing non-life impact of the credit crunch. insurance companies in estimating technical reserves.

Basel Briefing 13 KPMG member firms provide a wide-ranging offering of studies, A series of technical updates highlighting analyses and up-to-date periodicals on the trends and sector issues pre- and post-implementation. developments in the Financial Services industry.

You will find the above publications available as free downloads at: http://www.kpmg.com/Services/Advisory/ and: http://us.kpmg.com/microsite/FSLibraryDotCom/index.aspx

Brendan Nelson Jim Liddy Vice Chairman, KPMG in the U.K. Regional Coordinating Partner Global Chairman, Financial Services Financial Services Tel: +44 20 7311 6157 Americas region e-Mail: [email protected] KPMG in the U.S. Tel: +1 212 909 5583 e-Mail: [email protected]

Jeremy Anderson Paul McGowan Regional Coordinating Partner Global Head of Tax Financial Services Financial Services EMA region KPMG in Ireland KPMG in the U.K. Tel: +353 1 410 1225 Tel: +44 20 731 5800 e-Mail: [email protected] e-Mail: [email protected]

Frank Ellenbürger Wm. David Seymour Global Sector Leader, Insurance Global Sector Leader, Investment KPMG in Germany Management and Alternatives Tel: +49 89 9282 1867 KPMG in the U.S. e-Mail: [email protected] Tel: +1 212 872 5988 e-Mail: [email protected]

Jörg Hashagen Gottfried Wohlmannstetter Managing Partner Advisory Global Head of Audit Global Head Advisory Financial Services Financial Services KPMG in Germany KPMG in Germany Tel: +49 69 9587 2141 Tel: +49 69 9587 2787 e-Mail: [email protected] e-Mail: [email protected]

K T Kim Chee Meng Yap Joint Regional Coordinating Partner Joint Regional Coordinating Partner Financial Services Financial Services Aspac region Aspac region KPMG in Korea KPMG in Singapore Tel: +82 2 2112 0400 Tel: +65 6213 2888 e-Mail: [email protected] e-Mail: [email protected]

news & dates

KPMG’s Financial Services practice takes KPMG’s Global top advisory prize at 2008 Euromoney Islamic Investment Finance Awards Management & Alternatives (IM&A) KPMG was named ‘Best Islamic Assurance and Practice – Sponsorship: Advisory Services Provider’ on February 5, at the 2008 Euromoney Islamic Finance Awards ceremony Fund Forum in London, U.K. Now in its 6th year, Euromoney’s International 2008 Islamic Finance Awards are regarded as the benchmark Barcelona, July 1 – 3 awards for the global Islamic finance industry. This is Europe’s largest and most prestigious event for fund and asset managers and continues to grow and attract over 1,500 key delegates from countries around the world. Delegates will benefit from an unrivalled speaker faculty of over 200 leading industry experts and unparalleled networking opportunities with an audience that reads like the who’s who of European Fund Management. Look forward to:

insights from New CEOs more leading fund buyers the Paul Myners Interview with special guest a new emerging markets summit special focus on the impact of the credit crunch In selecting KPMG’s Financial Islamic finance into new markets, a new Fund Industry Services practice, the magazine said: national financial regulators exploring Analyst panel “KPMG’s breadth of assignments and Islamic finance for the first time, the diverse geographic spread of their and the conversion of a conventional KPMG’s Global IM&A practice has business was very impressive and bank to a stand-alone Islamic bank. a long-standing association with this was a key factor in selecting the In addition, KPMG is a member of the event and is proud to be one of the company for the award. KPMG’s Accounting and Auditing Organization principal sponsors again this year. As assignments span Europe, the Middle for Islamic Financial Institutions such we can offer a special discount East, Asia and Africa and it is well (AAOIFI) and the Islamic Financial to our clients. For more information positioned to work with its clients as Services Board (IFSB). please visit our Web site: Islamic finance expands globally.” www.kpmg.com/About/Events/ Over the last year, KPMG member firms have provided assurance and advisory services to over 50 Islamic financial institutions in the U.K. and Western Europe, the GCC, the Far East, North America and Africa. This work includes services undertaken on behalf of ventures looking to bring

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular © 2008 KPMG International. KPMG International is individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such a Swiss cooperative. Member firms of the KPMG 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 upon network of independent firms are affiliated with KPMG such information without appropriate professional advice after a thorough examination of the particular situation. 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. Printed in the U.K. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. Produced by KPMG’s Global Financial Services Practice in the U.K. Designed by Mytton Williams Publication name: Frontiers in Finance Publication no: 311-956 Publication date: March 2008 Printed on recycled material