Elixirr and Kaizen to aid financial institutions transaction reporting compliance

29 March 2018 Consultancy.uk

Last year, almost two thirds of transactions reported by financial institutions were incorrect, resulting in fines from the Financial Conduct Authority (FCA), while firms were unaware of these inaccuracies. In order to help address this, UK-origin consulting firm Elixirr has partnered with regulatory reporting assurance group Kaizen, to deliver a complete end-to-end regulatory reporting remediation service for financial institutions.

Data quality has been a continual problem under the original MiFID reporting regime, but the increased complexity of EMIR and MiFID II reporting obligations means that this will be even harder to achieve. In January 2018, MiFID II came into effect, having originally been scheduled for implementation the previous year. The sequel to the Markets in Financial Instruments Directive updates a number of rules from the original to improve the transparency of the European financial market and strengthen the protection of investors, further putting financial institutions under scrutiny to account for their transactions.

At the same time, regulators’ capacity to identify issues has widened, while the UK’s Senior Managers’ Regime adds pressure on individual managers within firms to ensure they are reporting correctly. Firms which fail to address reporting issues are at risk of multi-million pound fines, reputational damage, and the cost of internally remediating the problem. According to recent analysis of transaction reporting fines, conducted by the FCA by regulatory reporting assurance experts Kaizen, 65% of transactions were incorrect. On top of that, 58% of these reported transactions had actually passed validation – but contained inaccurate data.Financial institutions transaction reporting complianceIn a bid to change this, Kaizen’s technology solution will combine in a new partnership with consulting firm Elixirr’s remediation skills to help firms identify reporting issues quickly and ensure they are resolved and replayed, in a cost-effective, seamless way. The industry will see the firms collaboratively offer clients greatly-improved assurance testing, governance and support on their trade and transaction reporting remediation projects.

Founded by ex-regulator and MiFID architect Dario Crispini, Kaizen combines detailed regulatory knowledge with data science, supplying a unique approach to compliance assurance, checking every single item of transaction data for accuracy and completeness, while Elixirr provides practical and hands on support to resolve the reporting issues highlighted by the Kaizen assurance assessment. Elixirr, meanwhile, has a proven track record of working with financial services firms internationally to help them identify issues and achieve full and sustainable reporting compliance. The firm’s alliance with Kaizen follows hot on the heels of another new partnership in the financial services sector with Thomas Cook Money – with the two signing a strategic partnership to create a new holiday money solutions service.

Barry Lewis, Partner at Elixirr who led the formation of the partnership, said, “Kaizen have developed a service that is invaluable to the financial services industry, so we’re delighted to partner with them in such a value-added offering. This partnership means we can combine robust data quality assurance tools with the analysis and remediation expertise of our team, and help our joint clients respond even more effectively to the increasing needs for reporting compliance.”

Commenting on the partnership, Dario Crispini, CEO and Founder of Kaizen, added, “By combining the skillset and expertise of the two companies we are able to provide clients with greatly enhanced confidence and accuracy when reporting to regulators. The market is already responding well, and I have full confidence that this partnership will quickly benefit our clients and go from strength to strength in the months and years to come.”

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.