Fees management and business transformation with SAP Banking. Chapter II.

Dear,

The traditional shape of the Financial System is being challenged by two drivers; capital scarcity and new business models facilitated by the technology revolution.

We saw last week how Banking fees are an example of the transformation from both perspectives; regulation and new competitors with alternative value propositions.

http://sapbank.blogspot.com/2014/09/fees-management-and-business.html

But the question remains, what are the traditional banks alternatives in the new scenario?

For answering the question we must remember that in the new environment capital is scarce, and whatever action we take it must be aligned with the principle of efficient capital management.

When banks executives plan to generate profits by providing a service to their customers, they must weight them with the cost of the allocated resources. Consequently, determining accurately service costs becomes a priority.

I mentioned last week, that SAP can offer best of breed functionalities for analyzing and tracking banking services costs; this is the basis for calculating the margin of the service, expected profits and return on the allocated capital.

In a financial contract, like a customer account, multiple services are provided, by internal and external service providers. Let’s have a look to some of them and the costs involved.

- Maintenance of the customer account provided by the customer account manager, or other Human Resources, supported by processes and technology.

- Withdrawal of cash in an ATM machine (from the bank or a third party bank). This means that the bank will support maintenance costs of its ATM machine or fees from another bank.

- Overdrawn facility, meaning that the bank has to allocate capital and liquidity for fulfilling the service.

Let’s have a look at the tools provided by SAP Banking for managing these scenarios.

Cost of processes.- We have several typologies that must be analyzed with different approaches.

Human resources costs can be direct like the bonus of the account manager, or indirect like call center manpower. In both cases the Management Accounting modules of SAP ECC, including Cost Center Accounting, Activity Based Costing will support the determination of the costs and consequently margins and profitability.

Assets amortization, including hardware, software, buildings, can be accurately calculated with ECC modules like Assets Accounting, and the ECC Controlling modules.

Data extracted from the calculations above will support the estimation of a tariff based standard cost that we can include in Bank Analyzer for determining process costs on contract level.

Fees cost from another bank can be posted directly on contract level (if provided by the billing interface with the third party). Additionally the withdrawal could happen in foreign currency, triggering P&L effects due to forex fluctuations between the withdrawal posting date and the clearing date with the third party bank. The whole construction is supported by Bank Analyzer AFI and Profit Analyzer.

Capital and funding costs (including impairment costs) related to the overdrawn facility are fully supported by the AFI and Profit Analyzer modules of Bank Analyzer.

All the above is just a brief description of the functionalities provided by SAP Banking, real scenarios are more challenging and interesting.

Looking forward to read your opinions.

K. Regards,

Ferran.

Fees management and business transformation with SAP Banking. Chapter I

Dear,
One of the main complains that consumers have about their bank is its fees policy.

When the customer is charged with fees, he requests to talk to a banking representative about it, he tries to get the fee reversed; and if this is not possible, he wants at least a reasonable explanation of the logic behind it.

On the other hand, management of fees is becoming a part of the bank’s revenue, particularly as very low interest rates and slow economy are making challenging for many financial institutions to improve their bottom line.

Banking fees had climbed every year since 1942, when the FDIC started collecting the data, and since then have been an important part of the relationship between the customer and his bank.

But this is going to change in the oncoming years, or at least this is the tendency we can see from a recent study of the US Federal Deposit Insurance Corp which shows that banking fees have dropped nearly 21% to $32.5 billion last year from $41.1 billion in 2009

http://www.marketwatch.com/story/bank-fee-income-in-decline-for-first-time-since-1940s-2014-09-03

What are the causes of this tendency change?

Mainly two reasons, new regulation and changes in market behavior.

For instance, Dodd-Frank establishes that the amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. 

http://www.icba.org/files/ICBASites/PDFs/DoddFrankActInterchangeProvisions.pdf

In addition, mobility paradigm provides customers with instant access to their bank balances from computers and smart phones making them less likely to spend more money than they have in their accounts, and consequently reducing overdraft fees.

In fact, the Fed released a survey in March showing that the most common use of smartphone banking apps is checking balances and tracking transactions.


http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201403.pdf

But reduction on Banks profits for fees are just the first sign of something bigger, technology is changing the rules of the game, and new, better positioned players, are ready to get their part of the cake.

New players like Paypal, Google, Amazon,Apple or Alibaba are integrating Financial Services in their online platforms, and challenging the traditional Banks position in the market.

The dominant position of these companies in the Internet provides them with a competitive advantage which is growing with the introduction of new technologies like Near Field Communication.

http://en.wikipedia.org/wiki/Near_field_communicationhttp://www.reuters.com/article/2014/09/04/us-apple-iwatch-idUSKBN0GZ2A820140904

A good example is Apple, which with Apple Store and ITunes, possess one of the biggest databases of Credit Cards in the world, capitalizing the market knowledge provided by it for promoting their own payment methods is a matter of time.

http://www.bloomberg.com/video/apple-s-iwallet-can-be-new-creative-leap-sculley-_KSwAkmQQ5utfiwTu9XPdg.htmlhttp://www.cnet.com/news/how-an-apple-iwallet-might-work/

What SAP Banking can offer in the new scenario?

SAP has the know-how for tracking and analysing profits and costs for services, including multidimensional Profits and Loss Analysis, Activity 
Based Costing, Services Product Costing, etc.

This know-how has been incorporated to the SAP Banking business suite, including SAP Bank Analyzer which is fully integrated with the traditional profits and costs tracking solutions of SAP ECC (Management
Accounting).

I have been working recently in some projects with strong requirements in fees analysis and customers profitability,

I’ll give you some details about them in a future post.

Looking forward to read your opinions.

K. Regards,
Ferran.

November 2014 and milestones on the systemic change.

Dear,

In every process of change every day is different than the day before, but when change is completed historians mark in the calendar those special days which explain the change.

For instance, if we look at the history of modern economy, we will find special days like the Black Tuesday, when the markets decided to believe that the Roaring Twenties were over, triggering the most devastating stock market crash in the history of the United States and starting the Great Depression.

http://en.wikipedia.org/wiki/Black_tuesday

September 15, 2008 is also an interesting day, when the US authorities decided to let Lehman Brothers fall.

On the previous weekend several alternatives were put in the table; merging Lehman with Bank of America as they did with Merrill Lynch, bailing out the bank as they did with Bear Stearns or AIG, or mixed solutions like bailing out the bank and selling the good assets to Barclays.

But the decision was letting fall the fourth-largest investment bank in the US; changing the rules of the game for the first time in 80 years.

November 2014 will be another milestone; by then, the new Single Supervisory Mechanism of the European Central Bank will issue the results of the stress tests that will make public what is the “real” situation of the European Banking System.

Since the starting of the financial crisis in 2007/2008 we have seen several audits of the financial system, telling us that the financial system was solvent, and acknowledging some months later that more capital was needed.

http://en.wikipedia.org/wiki/List_of_bank_stress_tests

This time is going to be different as it has to be different, rumors say that 9 European banks are going to fail and 51 billion Euros are going to be needed for recapitalizing the system. Other rumours are more pessimistic and predict that 100 billion euros will be required.

http://www.reuters.com/article/2014/09/03/banks-goldman-survey-idUKL1N0R32IL20140903

Whatever the final figure is, the important consequence will be that the banking European system is undercapitalized.

But, only the European banks have solvency difficulties?

Of, course not.

In a global financial system everybody is connected and affected by the others; and what happens to one, it happens to the system.

Once again, look at the global debt clock.

http://www.economist.com/content/global_debt_clock

According to it, every Belgian carries a public debt of $45,405.40, every Briton $40,456.90, every French $37,989.90, every Spaniard $23,093.85, every Greek $27,189.68, etc.

And don't forget that on top of this mountain of public debt, the financial system is full of private debt, carried by corporations and individuals.

Are capital markets naive enough for believing that this debt can be paid?

Assuming that European banks, main holders of European public debt, need 51 billion Euros of Capital, with very low public debt interest rates; how much capital are they going to need, when capital markets decide to become anxious and raise the spreads?

I asked the same question to a reader of my blog, with management responsibilities in a European bank, who contacted me some months ago. He acknowledged that more capital is going to be needed and capital optimization is going to be a critical activity.

Unfortunately, he was not able of describing any concrete action for optimizing capital management on his bank.

Intriguing, isn't it?

By the way, in my opinion issuing shares or subordinated debt means increasing capitalization levels, not optimizing capital management.

Looking forward to read your opinions.

K. Regards,
Ferran.