Digital Smart Money - Implementation Framework

Digital smart money could very well be the next disruption hitting the finance market. However restricted money has been in use for many years now. The food coupons that many companies give its employees is a good example of smart money. Currently, Sodexo, is a good example of that. They have different coupons for food, shopping, etc. The various gift cards from the retailers or flying miles that we get by flying a particular airline is also a kind of restricted or smart money.

To implement a full-fledged, government/central bank led smart money ecosystem, there are multiple things that we need to take into account.

1.     Regulatory framework

As explained in the earlier courses, regulatory framework is becoming more open in certain cases and stricter in some other cases. One such strict area is w.r.t KYC and ensuring that money is not being used or transferred for terror funding. Various new laws are coming up across the globe for this.
This necessitates a clear and secure regulatory framework to handle smart money. Some of the key legal requirements would be –

• Identify the nature/type of smart money
• Identify payer
• Identify payee
• Identify actual usage
• Ensure honoring of the payments

Ensuring that these aspects are being tracked will mean there is less chance of money going into the wrong hands and also reduce frauds.
We also need clear taxation laws for the different types of restricted money based on the usage and restriction types

2. Usage types
A clear framework of usage types is needed. Currently, currency used in one country can be exchanged with that of another country based on exchange rates. This is because there are not “types” of currency. All currencies are “generic”. However, with the advent of smart money, we will have to define a clear framework of usage types that is acceptable across the globe. Once we have that, it will becomes possible to exchange the smart money across various countries if needed. These usage types will have to be generic enough to be used across countries and specific enough to be differentiable.
e.g. Food money, Infrastructure money, etc.

3. Restriction types
While smart money is restricted in its use, it is important to note that it is finally money – that has to have following important characteristics

• Medium of exchange
• A unit of account
• A store of value

If we take the “store of value” into account we see that if we have some smart money with restriction on its use, it loses its value if the restriction is not fulfilled. While, this may be correct for certain usecases, it may not be correct for certain other usecases. Hence a differentiation is needed in the type of restriction. The proposed type of restriction is –

• Permanent restriction – Restrict the usage type permanently. There’s no way to change it at any point of time. This type of restriction should be used only when there are clear guidelines and associated taxation and other laws mandate it to be this way
• Temporary restriction – This will provide a time bound restriction. Once the time period is over, the unused smart money can either be changed to some other form or can be stopped from usage. E.g. if a donation for a specific usage like building a house is given to a charity organization for 1 year, the payer can decide to stop the usage of that money if unused after a year

4. Usage ecosystem
Once the whole framework of usage, restriction and legal is ready, a robust usage ecosystem is needed. Usage ecosystem will need 5 important aspects to be clearly defined and built-

• Creation – Smart money will have to be “created”. The central bank could be the creator of smart money for each country. It will have to ensure all the frameworks are in place and all software is in place to effectively generate specific amount of smart money while ensuring compliances
• Distribution – Once the smart money is created, it needs to be distributed into the market. E.g. companies will need to take the right amount of money through the banks and then distribute it to its employees as part of their salary. This distribution through banks, and other ways will have to be clearly formalized like it is today for general money
• Exchange – Once an individual has the money, how is it exchanged? This becomes a critical component of the ecosystem. Today’s credit cards or debit cards are catering only to general money. The other specific cards (Sodexo, shopping cards, etc.) are specific to a type of smart money. We will have to come up with a distribution and exchange mechanism where different type of usage money is easily manageable and exchangeable rather than having different machines and cards for different types. One way to do this could be have a common card with different types of money and giving the option in the receiver’s card machine to take from the correct account. Another could be to enable mobile wallets that can hold all types of smart money and user can select which type to use during payments. With the advent of NFC and other technologies in conjunction with wide proliferation of smart phones in the population, this could be the best way to handle it.
• Interchange – A corollary to exchange between two parties is the changing in the usage type of the smart money. This should also be possible; however, the legal/taxation compliances will have to be taken into account while doing so. This will be a critical component of the overall usage ecosystem
• Withdrawal – Central bank needs to periodically withdraw and infuse cash in the system/market to maintain a good liquidity ratio and control the macro economics of the country. Hence, withdrawal of smart money should also be possible depending on the need

5. Governance
Governance becomes the most critical aspect of smart money. Even in today’s world, with only one type of currency, governance of money at macro level and micro level is extremely important. With smart money, it will become even more critical because of the sheer different types of money and the possibility of interchange between them. Having a central regulating system to govern this might not be the best way to do it. There are two possible options –

• One central regulating system for one type of smart money – This will mean there are multiple regulating systems and then a common regulating system residing on top of it for central control on interchange
• Second option is to have distributed governance on this based on block chain technology. Given the nature of block chain technology, it seems possible to have this kind of governance model. However, more studies and innovative solutions will have to be brought into picture if this is to be done

Smart money, is here to stay and digital smart money is very likely to be next disruption in FinTech. We may be on the verge of starting this new disruption and hence having the right framework in place now, finetuned by the best minds in the world would be the way to move forward.

Do we need SMART MONEY?

Digital smart money could very well be the next disruption hitting the finance market. However restricted money has been in use for many years now. The food coupons that many companies give its employees is a good example of smart money. Currently, Sodexo, is a good example of that. They have different coupons for food, shopping, etc. The various gift cards from the retailers or flying miles that we get by flying a particular airline is also a kind of restricted or smart money.

                Given this, it is easier to see the circumstances where smart or restricted money can be useful. Any situation where the money is being given for a specific purpose is where smart money will be useful. This way the payee cannot make wrong use of the money given by the payer who decides how the money is to be used. Various examples can be given for this –

• Specific types of allowances given by a company to its employees
• Taxable/non-taxable money
•  Pocket money given to kids by their parents
•  Donations given to charity organizations for specific purposes
•  Money kept aside by corporations for certain specific activities like investment, debt fulfillment, expansion, etc.
• Food coupons given by the governments in some cases to the needy
• Any other government or other organization’s help provided for a specific purpose
• There could be many such examples and ways in which restricted money can be used

While there are various ways in which smart or restricted money can be used, there are a multitude of problems that it is likely to solve. They key aspect is guarantee of the money being used for the right purpose.

• There are various situations when we as individuals need to give money to another for a specific purpose, but there is no way for us to track if the money was used that purpose only. For e.g. giving money to kids for food at school or for books. Giving money to someone for medical expenses. With smart money, this problem of ensuring that the money is used for the right purpose is resolved.
• This problem of right purpose is there even for institutional or individual contribution to say a charity or social cause. If smart money is donated or loaned for a specific purpose, then it will bring a certainty in the use of that money for it.
• Corporations today put aside certain cash for specific purposes in their balance sheet. However, there is no guarantee that the money will be used for that purpose only. Such fraudulent behavior will be restricted if the money is kept aside as smart money for activities like investment, expansion etc. This way shareholders are certain that it won’t be misused and if any change in type of restriction is to be made, the shareholders can have a say in it.
• Government subsidies or social security scheme can also be done through smart money, thus avoiding possible misuse of the funds for other purposes

While there are many such examples and innovative ways in which smart money can be used, one thing that we should remember is that the core issues that smart money solves are –

• Transparency
• Non-anonymity
• Trust
• Guarantee of correct usage
• Fraud-free
• Trace-ability
• Organization of priorities

With various new disruptive ways of money management coming into picture it becomes more important for us to ensure that these disruptions are also supplemented with the correct and valid use of money rather than anonymity in such transactions making it safer for us to embrace the new technologies better.

What do you think?

FUTBAL (c) framework for transformation

I was reading this article posted on LinkedIn.

https://www.cnbc.com/2018/09/06/companies-worry-more-about-access-to-software-developers-than-capital.html

It got me thinking into the various aspects of digital transformation and future of IT across all industries.

• Understanding your company

This is probably the most critical aspect. Everyone has a different viewpoint and each viewpoint can result in a completely different direction the company can take in order to transform itself. While some of the directions taken could be outrightly wrong, most of the directions can take the company forward. But not all of them will take the company to the destination expected and that too within the given time and cost. That's where a leader or leadership team that understands the ramifications of each path is needed. Unfortunately in many cases, that's where the issue is. There's a tendency to either overestimate or underestimate the company capabilities. Not every company can be Amazon or Google like mentioned by the author in the article. Saying that we are not Amazon or Google - is it defeatist? Not at all. It is defeatist when you are deciding this only to abdicate your responsibility. However, if you really understand and accept your own or your companies limitations, then it is the most realistic way of achieving your target

• Buy vs Build

This debate has been there for as long as IT has been in place - and it will never end. There's no one size fits all solution for this. A balance is needed between the two. There are many applications and products available in the market that you can straightaway use instead of reinventing the wheel. What you definitely cannot outsource is your IP or intelligence of the company. There are many things that every company does in a specific way and that could be a game changer when it comes to the industry. Processes can be standardized when you have inefficient ones, and they can be made specialized when you are really bringing value into it. Specializing or standardizing just for the heck of it doesn't work. Spend time creating value rather than wasting it reinventing the wheel. Yes software developers will be important for the things that you are going to build, but thinking that only software developers will see the company through, sounds naive.

• Foundation and All speed IT

IT development model started from Ad-hoc development in the early years and moved on to Waterfall to Agile to Devops to Bimodal IT as prescribed by Gartner. While going through these modes, there was a clear change in thinking. With Adhoc, there was barely any documentation and thoughts around overall foundation or Architecture of the company's IT stack. Moving to Waterfall ensured that enough time is spent on these aspects but it reduced the speed and increased the cost of implementation and changes. Moving to Agile was a way of getting over this limitation and provide a better way of dealing with things. However most of the companies ended up implementing a pseudo-Agile model and conveniently left out some of the most important aspects of architecture and documentation. To overcome with pseudo Agile (and to bring some more advantages) Deveops method was developed. However devops has limitations in the circumstances in which it can be implemented. Gartner came up with a Bimodal way of working where some projects were to be implemented in an agile/devops way and some in a traditional waterfall way. This was a good model however we soon realised that 2 modes are not enough. We needed more. We needed specific mode or speed for specific type of projects. That's where the All mode development model has come into picture. 

The problem with this model is that we might move towards the original Adhoc methodology while trying to implement this. This is what we need to guard against. A very clear direction, push and understanding is needed to go for All speed IT to make effective use of it. It will help in getting all core foundation layer and architecture managed in a different way and all other projects managed in different ways depending on the situation. Documentation and collaboration will be the keep to avoid the traps

• Leadership

Buy vs Build applies to the leadership team too. The company may have excellent leaders who understand the technology and the business and also know how to drive transformation. If such leaders exist, they should be retained and given the responsibility of taking things ahead. However, not all qualities maybe existing in the company - so getting someone from outside to compliment the existing leadership is needed. There's no point in going to the extreme on either side of Buy vs. Build. Neither in technology nor in Leadership.

• Trust

This is one of the key pillars of any Transformation journey. Trust among the members of the leadership team, trust between managers and the team members, trust between teams and trust across the organization. Without this, no transformation can succeed. It's easy to say that we are a very trustworthy company (or we have a very trustworthy and trusting organization culture) but the reality that we often see is that it is not the case. Many surveys across organizations from various industries (especially anonymous surveys) have shown this to us. Building trust is a slow and tedious but necessary process. There are high chances that one action can bring the trust quotient crashing down but unless you persevere, there's no way forward.

So what is this framework called? FUTBAL (c)

FUTBAL (c) Framework

There are many models for transformation. But considering the more comparatively "non-technical" aspects of the transformation journey, FUTBAL (c) model would be able to provide a way ahead.

Digital Transformation strategy for Financial services

Current Challenges to the Finance industry

Tradition

Financial services have traditionally been slow changing services. Customers of financial services/banks etc. have been traditionally more loyal, slow to adopt change and have been used to more personal connect than technological connect with the bank.

Proliferation of smart access

With the advent of online banking and mobile banking services, the personal connect with the bank has already started reducing over the last few years. In addition to that, with the proliferation of mobile internet and smartphones across all age groups and all strata of the populace, means that it is becoming more and more simple for people to use mobile based banking rather than the traditional way of banking and other financial services

Change in demography

More and more millennials and other tech savvy consumers are increasing in the market. Due to the deep penetration of the smartphone and internet, more people are now becoming technological competent and are trusting it more than earlier. Also, these tech savvy consumers do not now show any kind of loyalty to the bank just because it’s their bank. They look for quick results, quick solutions and are more than willing to move to a competitor if they’re getting quicker financial services from them. This means banks and financial institutions now need to start becoming more agile and responsive to the customers’ needs

Unbundling of financial sector

Regulations in financial sector are changing in multiple ways. On the one hand the regulations are opening up the traditional value chain of the of the industry, thus disintegrating the traditional monolithic way of working into modularized value chain where the competition can happen at multiple and concentrated areas. At the same time, some regulations are making the core banking business tougher, thus in a way reducing the number of players in it but at the same time increasing the security safety of the financial sector. Eg. The GDPR, PSD2, etc.

Technology explosion

Technological changes and improvements have been happening in exponential manner over the years. The storage space, computational power, proliferation of smartphone, communication technology has improved leaps and bounds over the past so many years and continues to change every day. Newer and better and more innovative technology is constantly being invented and its growth is happening at mindboggling speed because of the internet. This means that there’s always some new technology to look at before we are even fully conversant with the earlier one. We have blockchain, big data analytics, microservices, APIs, etc. which are flooding the market and it’s up to us to make the most use of it all.

Innovations and disruptions

With this ever-connected world, more innovative and disruptive ideas are finding their way into our life. These innovations are not just improvements on existing way of doing business, but they change the entire business model. For e.g. Uber completely changed the taxi business. Social media platforms like facebook, twitter etc. have become a way of communicating with each other like never before. Mobile wallets, bitcoins, various aggregators connecting multiple banks’ loan processes to a single front end, etc. as newer and quicker innovations that make it easier for consumers to use financial services without bothering about the complexities underneath. The unbundling of the financial value chain has made it easier to do these innovations at the top customer facing layer and many players have started bringing in newer products for the customers.

Ride the wave

Traditional financial services need to gear up or shut down. They cannot sustain this onslaught of innovation and technological and demographic changes unless they ride these changes and come out triumphant. One major change needed is the mindset of innovating and continuously improving. Without this traditional financial services company will die a painful but quick death.

Digital Transformation strategy

Digital transformation strategy for financial services companies needs to be multi-pronged

1. Consolidate the core
2. Platformize & open up the core
3.  Innovate the offerings
4. Coopetition
5. Continuous improvement

Let’s take these strategic initiatives one by one

Consolidate the core

For a traditional financial services company that has probably been around for years, the core business is the financial service itself. Banking for example. Such banks have a vast amount of expertise in the core banking and are very well regulated. This is their strength. It will do well for them to consolidate their core business by ensuring that it is a very comprehensive and compact unit. All duplicate processes need to be reorganized and org structure and functions revalidated and compacted. This way, the core business becomes more efficient and productive.

Changing regulations are then easier to manage in this core unit and newer companies are less likely to compete in this domain despite money power, due to the sheer complexity and depth of knowledge. Banks will always have the upper hand and will be ahead of the curve in this area.

Platformize and open up the core

The core business should be platformized. Meaning, the core business systems should be fully integrated and various functionalities of the business should be exposed to be used in various ways. The services can be exposed in multiple ways but the most suitable way technologically today is through using the APIs. These APIs are business functionality exposed through technical interface for anyone to use. The platform needs to support various business models in this case where the functionality could be atomic or contextual depending on the business model. That way, the platform can be exposed to be used by partners or customers irrespective of their business relationship with us. Saxo bank and Danske bank are good examples of this

Innovate the offerings

Using the APIs exposed, financial services can be then provided to the customers using innovative ways on various platforms. Customer portals over the internet are just one of the ways. More and more, mobile app based innovative service offerings is the key and the banks should expose all its services in simple but innovative ways to the end users. By making the platform available openly to other developers to develop their innovations, the core can be monetized and at the same time, more innovative products enter the market for the customers. The more customers use these, the more the bank’s core gets monetized. In addition to that, these innovative products can then either be replicated or partnered with to increase revenue from the front ending services of the bank itself.

Coopetition

Banks should understand that no matter how intelligent their own people are, innovations can come from any source. Instead of fighting for bringing in the next innovation themselves, they should enter into a coopetitive mode with the others in the industry and use their expertise where possible and partner with them rather than fight them on every occasion. These innovative companies can sometimes be taken over but sometimes just partnering is more useful and cheaper. This way the bank can always have the best of the innovations and innovators working with them rather than against them. The faster the banks do this, the better advantage they have in the market.

Continuous improvement

Technology changes. Fast. If one thing is an innovation today, it is a passé tomorrow and something new comes up. This change is constant. The banks should build a culture of innovation and ensure that everyone understands that the only way to be in the game and keep winning is to keep improving on all fronts. Various moonshot competitions, design thinking, fail-fast attitude and other cultural changes should be given a high priority in the company.

                Two speed IT that eventually evolves into an “all speed IT” is needed for ensuring that the core platform keeps getting consolidated and more robust while the innovations keep coming. This needs a change in the mindset of the entire organization.

                Hackathons and such events where the banks can get the best of the innovators and ideas into a single room and eventually partnering or financing the best of ideas can help in being ahead in the innovation trajectory and enjoying the leader position for a longer time rather than losing out to the other competitors. An example is the Barclay’s bank’s hackathon that provided them more than 500 innovative ideas and thousands of hours of prototyping within just 2 days.

Digital transformation is multi paced, multi-pronged and multi-faceted. However, with the right attitude and supportive and understanding management, this can be achieved. The mantra always is, to improve and keep improving. Always.