Future of Banking

(run spell and grammer check)
April 22, 2016

Blockchain -

Blockchain is the foundation on which lot of innovation will breed in next few years. Just as TCPIP laid the foundation of internet,internet laid the foundation of mobile and so on... blockchain will change the way we do business in bank
Collateral management function will be greatly benefited. Dispute management today involves quite a bit of human resources and time delays. Imagine if trade booking, trade sensitivities and all the factors which goes behind calculation of collateral can be stored and certified in an immutable store which is endorsed in real time by each of the party involved. Thats it. Dispute management is a moot point. Capital thats locked in the process today will be mostly unlocked. We won't need such big operations army to handle this function.
Settlement management is another function that will be streamlined. Today banks exchange their own version of entries. Systems within the bank rely on reconciliation which is error prone, costly and time consuming.
Other  main functions - Triparty custodian workflows, payments
What's next - take a good training in blockchain

Consumer Banking -

Banking will become part of consumers day to day experiences. They won't go to the bank to do the banking, rather banking functions will be provided to them as part of thier day to day activities - wishing birthday wish, buying a home, looking for a service provider etc.
Social media company will start integrating banking functions and provide value added services to the customers. Facebook already offers peer to peer payments over chat.

Blockchain will lead to removal of middleman such as financial institution (security still have to be worked out). Peer to peer money exchange will be over open ledgers (atleast relatively small amoounts). Foriegn exchange agnostic currency will come into play (eg bitcoin).

Bank branches will turn into something to the effect of Apples's tech bars. Customers would expect one-stop shops - groceries, coffee, banking products, merchandise all together. Brick and mortar stores would have to add justified value for customer to come here instead of doing its business online.

May 4, 2017

Margin and Collateral Management

Its amazing how a simple function can evolve over time into a complicated web of processes and organization. Question that arises is following - what incentives does incumbents have, so they make sure a business function is ran in a cost-effective manner while leapfrogging towards innovation keeping risk-rewards balance in the mind. LOB head are likely to keep expending the organization and making the LOB more important in the grand scheme of company's business model. Workers on the line are likely to maintain the status quo and not promote anything that takes away their own job or makes the role less meaningful.
Collateral Management is essentially about maintaining the 'right' level of collateral to cover the risk during two (or three or more) parties become part of the transaction (trade, loan etc). You and your counterpart evaluates the perceived value of the asset under transaction and the collateral that covers that transaction. Any difference (margin) needs to be exchange. Some of the big banks have 100+ resources globally, just to take care of this function. When we study the operational workflow and various tasks that are performed by the workers in this function, it can be clear that most (almost all) of this can be automated without a need for a person to click buttons on UI or making phone calls. 2008 financial crisis made these interactions more involved and this created more overhead to the banks. Middle management asked for more resources while senior management demanded more automation rather then throwing more resources. Banks somehow comprised in the middle and business moves on usual. Its clear Senior Management wants cost optimization. What should be done to ensure every single person involved in such LOB be aligned to the objective of streamlining and optimizing cost.
 - Well defined KPIs that have clear ownership and expectations. These assignments should be LOB managers who are responsible for P&L.
 - Make IT own some of these KPIs. IT should not just be an order taker, rather it should be sitting on the table as business partners and proving their inputs to meet business objectives. How does introduction of no-sql database benefits business, does it make business sense and does it justify the investment given overall agenda (it it performance, high availability etc)
 - Workers should be rewarded for innovative ideas. They are the one at ground level most familiar with the tasks that we are talking about optimizing. Make the works own very specific optimization agenda and well set success criteria. Instead of pushing the change to them or making them part of the change, find every opportunity to instill this into their DNA.
Here are some of the processes, methods and technologies which should soon lead to fully automated Collateral Management function:
1. Blockchain - exchange of the margin calls which currently involves statements, click of buttons, and in some cases phone calls. Moves and settlements which takes 1-2 days to settle. Reconciliation of positions and collateral which involves investigations and followups.
2. Machine Learning - what are the signs a customer is likely to default (reduce capital cost); what are the signs a customer is likely to buy a complimentary service (potential new revenue); segmentation of customers based of the behavior and type of interactions they exhibits (differentiated service); what manual tasks can/should be automated.
3. Collateral Optimization - ability to create a common view of available collateral across the whole enterprise and be able to select the most cost-effective and risk-acceptable bucket of collateral to satisfy client obligations.
4. More API based intra-bank/custodian interactions
5. Consolidation of most common and non-value added utility functions into plug-n-play products or industry shared hubs.