Category: Business

While consumer-facing tech like real-time payments and mobile banking hold great promise for banks, updates to behind-the-scenes infrastructure could be the key to cost savings and competitive advantage. With improved regulatory clarity and the prospect of normalized interest rates, technology will be the future battleground of differentiation for both consumers and investors. As an example, most bank consumers in developed markets are expected to have access to real-time payments by the end of 2018 allowing banking transactions to be completed with a swipe of the smartphone. But customer-facing applications aren’t the only differentiators that investors should be watching. As mobile banking increases customer traffic, having efficient scalable back-end systems becomes critical. Behind the scenes, digitization in banking has the potential to boost back-office efficiencies, reduce operational risk and improve profitability.

Over the long term, tech advances such as artificial intelligence (AI) and blockchain will clearly play a role in the evolution of banking. However, modernizing the infrastructure backbone that is, the core banking systems which handle the backbone of a bank’s activities, such as deposits and credits is the most important step banks will need to take. In order to remain competitive, banks will need to update technology on the back end in order to deliver a seamless experience on the front end since customers will have little tolerance for glitchy apps no matter how sleek the user interface. Investments in cloud computing and robotic process automation (RPA) should also take priority. Both of these investments offer an immediate opportunity for cost savings in the back office, while at the same time putting banks in a better position to compete with FinTech’s.

To better gauge infrastructure spending, analysts recently analyzed IT expenses over the last five years and earnings call transcripts over the last two years to better understand how banks are spending their IT budgets, gauge their progress against their competitors, and identify banks with the highest potential for improvement:

Core banking systems: With many banks still operating off a patchwork of legacy systems, most banks will need to make some improvements to their backbone. Migrating to a state-of-the art core banking system could reduce cost/income by 9%.

Cloud computing: Most of the banks are moving to the cloud, which offers the potential to shrink relevant infrastructure costs by 30% or more. Leaders have already moved 10% to 40% of their servers and operating systems to the cloud, and many are targeting up to 80% by 2020.

Robotic process automation: Among all of the technologies on the table, RPA may have the greatest potential in the near term. Put simply, these applications (robots) transfer information from one system to another, automating processes previously handled by humans; this can include everything from customer onboarding and payment reconciliations, to fraud prevention and compliance reporting.

It wasn’t until recently that hedge funds began paying attention to the market of digital currencies. Rollout of futures trading for cryptos and soaring prices have some large firms considering whether or not it is time to enter the market.

Funds are looking to profit by either buying bitcoin and other cryptocurrencies or by betting against them. Their entry and acceptance could provide more fuel to bitcoin’s already volatile trading. Quantbot Technologies Fund, Schonfeld Strategic Advisors , and others say they are working to understand how they might be able to profit from bitcoin.

“The market has gotten more interesting and the barrier of entry has fallen. Especially now that bitcoin futures are available” said Keith Knutsson of Integrale Advisors.

Some large firms and investors are already investing in bitcoin. Horizon Kinetics LLC, a firm that manages over $6 billion in hedge funds, mutual funds, and other products has been rather vocal about its recent purchases of bitcoin and other cryptocurrencies. One of the main reason for the exposure is the firm views the equity market as expensive, and the possible upside sizable for bitcoin as “enormous”.

Already, there are around 20 funds, managing a total of roughly $2 billion in assets, that predominantly trade cryptocurrencies. Some hedge-fund managers are becoming more willing to accept the risk of bitcoin after facing losses in traditional investing.  The introduction of bitcoin-based futures by CME Group and the Cboe Global Markets Inc. adds to the legitimacy of the currency for some big investors. Cryptocurrencies could be something to look into.

In concurrence with macro research performed by Integrale Advisors two months ago, emerging markets are struggling. The rand and South African government bonds have endured their worst week since the ousting of its finance minister in March of this year. A combination of economic uneasiness and political tension causes investors to expect another credit-rating downgrade.

The implications of a weak rand include an increasing cost of imports and inflation. The 10-year Yields on the government’s benchmark rose as high as 9.3%, the highest level since June 2016.

The updates from ratings agencies S&P and Moody’s on South Africa’s debt are due in November. In the past year, both ratings agencies downgraded the government’s debt once. A further cut would see the local-currency debt fall into junk territory. This would implicate an expulsion from Citi’s widely-tracked World Government Bond Index.

The South African Reserve Bank continues to struggle against stagnant growth despite high inflation, with this development further amplifying fundamental issues. In August, the central bank employed quantitative easing through rate cuts, but the increasing inflation make it doubtful for such a measure in the future.

Political turmoil exists due to allegations that the renown Gupta family used connections with the president to influence and profit off government business.

Keith Knutsson of Integrale Advisors commented, “forecasts for South African growth exceeded rationality; a cautious eye on the developments hinted at such predicaments for quite some time now.”

The current Minister of Finance, Malusi Gigaba, reduced growth forecasts and issued a warning for higher than previously expected fiscal deficits until 2020.

The surging blockchain market could prove itself to be a valuable tool in real estate purchases. With the abundance of government regulation and brokers, blockchain could increase the liquidity of the real estate market. The additional liquidity could foster demand and command a shift towards higher real estate prices.

Blockchain enables authentic purchases without physical presence. A shift in use from paper to blockchain for physical assets would improve time, security and transactions costs.

Keith Knutsson of Integrale Advisors commented, “even if the impact of blockchain dictates only a small percentage on the overall real estate market, we are talking about an over $200 trillion market; a fraction of a percentage could proof itself to be a valuable niche for investors.”

Currently a host of start-ups are tackling the blockchain real estate market with goals of providing simple transactions, such as a property in the Ukraine that was recently sold, or raising of funds for commercial and construction projects, an area the young company BitProperty focuses on.

Due to the blockchain ledger receiving updates on thousands of computers at the same time, exploitive attacks to alter an entry are mitigated. Even if an attack was possible, the blockchain is transparent and audible. A current hurdle is the digitization of previous records digitization, whose various formats and jurisdictions prove a challenge.

While transactions could see a revolutionary change, blockchain could also impact the ability to alter renting of land and airspace through automatic verification of property ownership in blockchain records, creating new forms of real estate ownerships.