Latin Finance - July 2008 - (Page 44)

guide investment banking Although they have been the single most important source of innovation and traditional banks continue to learn from them, they have significant difficulties growing into large scale organizations. Of course, there are notable exceptions to this, but for the most part AFIs remain small. Solutions IBM and an extended network of partners are currently establishing five regional, shared processing hubs to achieve these savings for the institutions serving the low-income segments; starting with Latin America, Africa, and Indonesia. The service will be web-enabled and charged on a per-use basis, allowing both large and small financial institutions to benefit. These hubs will not only bring savings to the industry, but will also deliver very specific microfinance, or low-income retail banking, functionality by supporting the key products and workflows of the AFIs. Among others, the benefits include: • Open access of AFIs to ATM, remittances and other national and international payment networks and switches. • Open access to financial products providers, such as insurance companies, to the distribution network of AFIs • Increase transparency and reporting quality by standardizing the reports to global and regional frameworks Growth Difficulties There are several traceable reasons for the AFIs’ difficulty to grow, however, we believe the root cause is the lack of appropriate IT to support their operations. One would think that it is a funding problem, but in our experience even AFIs with expensive back-office systems are less efficient than traditional banks. Our research shows that on average, these institutions use a disproportionate share of the cost (% of the loan amount) for operational purposes; so when a certain volume level is reached, it becomes very difficult to compete with traditional retail banks. This hinders AFIs’ ability to continue growing and establishing long-term, sustainable operations. Type of Information Management System Applications FS Applications Cross Industry Products and Funding Microfinance Processing Hub Interfaces Payment Networks Remittances Networks Credit Bureaus Proprietary Applications ATMs Networks/ Switches Infrastructure Management Data Center Infrastructure Off-the-shelf (10%) Accounting Customer Management Payroll Collections and Recoveries Risk Management Liquidity Management Agent/reseller operations Core Banking Storage Business Recovery Services Perofrmance Monitoring DB Management Manual (11%) Spreadsheet (35%) Mobile Devices/ Carriers National Banking Networks Help Desk Leves 1, 2 and 3 Security Reporting (i.e. MIX, regulatory) Firewalls Redundancy Connectivity Service Oriented Architecture Websphere Message Broker In-house (19%) Microfinance Institutions Underbanked/rural population Custom Outsourced (25%) Conclusion Traditional and alternative financial institutions have developed core competencies in customer acquisition, account management, and product cross-selling; these capabilities require deep customer understanding. This can be achieved by appropriately leveraging the data coming out of the IT functions. As regulation and technology evolve, these IT functions converge and it becomes less differentiating to perform them in-house. We expect that, by enabling profitable business models to serve the low-income segment, more institutions will enter this market improving prices and quality of service for endcustomers. The answer to these challenges lays in the collaboration of multiple parties, such as financial services providers, regulators, and technology providers. I The IT components of a banking operation were developed to serve the traditional medium-to-high income segment. The level of sophistication reached by established retail banks, and the IT tools to support it, are not necessarily applicable for institutions serving the low-income segment. The technology implications needed to profitably serve the unbanked and rural segments continue to be a challenge for financial institutions of all sizes. For the last eighteen months, we have been working with several traditional and alternative financial institutions across the five continents, to identify the functional requirements and the IT implications required to serve the low-income segment in a profitable manner. One key conclusion is that substantial operational cost reduction is required, and by substantial we mean order- of-magnitude reductions. This steep decrease in per unit cost (transaction, account) can be achieved through the aggregation of the demand for high-cost IT functions like core banking. By aggregating the demand and sharing the cost across several institutions, the resulting economies of scale can actually deliver the savings required by institutions playing in this segment. IBM Global Business Services Alberto J. Jimenez, Global Business Advisor FSS Telephone: +1.877.604.5163 Email: alberto.jimenez@us.ibm.com 44 LATINFINANCE 2008

Table of Contents Feed for the Digital Edition of Latin Finance - July 2008

Latin Finance - July 2008 Contents Investment Banking Outlook Compensation Survey Colombia Investment Banking Borrowers vs. Investors Banorte Profile Braskem Financing Strategy Brazil Hydro Finance Peru Port Privatization Panama Money Flows Argentina Local Markets Guide to Banking Technology Who Said That?

Latin Finance - July 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.