Weak Global Consumer Market

The consumer market pertains to purchasers who buy products and services for consumption instead of resale.

Usually, consumers are not similar in their choices and buying manners because of various attributes that can differentiate one consumer from another.

The attributes include demographic, psychographic, and geographic characters.

Features of consumer markets based on demographics consist of life span, indigenous background, earning potential, job, educational background, household size, faith, and country of origin.

Characteristics of consumer markets on the basis of psychographic consist of interests, functions, views, ethics, and outlooks.

Attributes of consumer markets on the basis of geographic characteristics include market dynamics, location, population density, and the environment.

Global FMCG firms were functioning in a weak consumer scenario with deflationary pressure in Europe and reducing growth in emerging economies.

According to Graeme Pitkethly, Unilever’s Chief Financial Officer, “We expected tougher markets and we’re finding tougher markets. Consumer demand remained fragile. Volume growth slowed further in the markets in which we operate, with market growth weak in emerging markets, negligible in North America and negative in Europe.”

Experts believe the trend would continue to be volatile in the immediate future. Consumers are asking for more bargains prior to purchasing a product.

The consumption-oriented US economy is not doing too well. According to the Cass Freight Index (monitors freight transactions), freight movement in March 2016 decreased 1.5% in terms of quantity from the previously abysmally low levels of March 2015.

This is the lowest level the index has touched for any March since 2010. High levels of inventories have also contributed to the problem.

The household has reduced their expenditure and decreased their debt. Analysts feel greater spending and lower debts are good for the economy.

A continuous fall in the energy sector investment has also impacted business expenditure. The global economy is in a sustained period of weak growth, which is referred to as the “New Normal”.

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Water Scarcity to Impact the Global Economy

Water scarcity impacts the over business climate. SME’s, conglomerates, farmers, energy producers, hardware manufacturers, and businesses would not be able to function efficiently.

Again, low quality of water or restricted access to water source would increase the costs for companies.

Water scarcity enhances risks for a society and undermines its competitiveness. At present, one factor is definite: water is not conserved efficiently while it functions as the facilitator of the global growth.

According to a World Bank study, water scarcity, aggravated by a deterioration in the climate could result in some regions losing up to 6% of their GDP, trigger migration and lead to a conflict.

The united impact of rising populations, increasing incomes, growing urban areas would result in an exponential increase in the demand for water while the supply becomes unreliable.

If measures are not taken at a global level, water would become scarce in areas where it is plentiful at present (Central Africa and East Asia) and scarcity would become worse in areas where water is not available easily (the Middle East).

The report further stated that decreased freshwater accessibility and demand for more water from other sectors such as energy and agriculture could decrease water accessibility in urban areas by nearly two-thirds by 2050, in comparison to 2015 levels.

There is a greater chance of conflicts across the globe. Food price increases due to droughts could trigger geopolitical uncertainties and force people to migrate.

According to World Bank President, Jim Yong Kim, “Water scarcity is a major threat to economic growth and stability around the world, and climate change is making the problem worse. If countries do not take action to better manage water resources, our analysis shows that some regions with large populations could be living with long periods of negative economic growth. But countries can enact policies now that will help them manage water sustainably for the years ahead”.

The harmful impact of climate transformation on water could be negated with robust policy decisions. Efficient water resource management is vital for the long-term growth. Global stakeholders must arrive at a consensus to deal with the climate issues.

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Medical Banking

Medical banking is concerned with the utilization of the banking systems to enhance the efficiency of the healthcare sector. It involves integration of banking process and healthcare value chain to decrease costs, enhance access and streamline the healthcare delivery.

Several processes such as payment of premiums by consumers, claims submission by the provider, and claims checking could take time and involve paperwork. The medical banking method looks at managing processes through electronic means by using the existing banking systems.

Medical banking also protects medical records pertaining to a consumer through electronic means that is in the bank’s custody.

Financial institutions offer services such as lock boxes, ERAs, EFTs which enhance the efficiency of healthcare financial transactions.

ERAs and EFTs facilitate automation of billing and accounts receivable systems. Under scenarios where the payment/remittance cycle relies on a paper-based manual process, financial institutions provide lock boxes, which facilitate check clearance on the day it is received, thereby decreasing the duration that the funds are in receivables.

Several customer-centric financial institutions are providing additional value to providers by developing digital image lock boxes.

The growth of consumerism, the requirement for related consumer-oriented tools, banks, and financial institutions have contributed to the consumer-oriented health care. This played a pivotal role in the development of medical banking.

In the recent past, health care stakeholders have been using the banking sector’s business processes, systems and assets to efficiently manage the increasing health care costs. There is a focus on facilitating improved coordination between payers, financial institutions, and providers.

The expansion of this model would be based on evolving requirements and priorities of the health care sector.

According to experts, in the coming years, the health care consumerism, the structures related to it, and the identification of opportunities to reduce administrative costs & enhance efficiencies would spearhead the model. Financial institutions that comprehend this would become dominant in the sector.

As per a report by the University of California, “Administrative costs accounted for 25% of healthcare spending in the United States – or approximately $230 billion annually”.

Healthcare sector must be more effective to ensure customer retention, and thereby stay in business. A lack of efficiency in the healthcare delivery and financing systems is also adding to the high administrative costs.

According to the healthcare actuarial firm, Milliman and Robertson (M&R), “The average cost to providers to process and collect on a claim is $11, ranging from a low of $8.50 to a high of $18. Also, on the payer side, the typical Medical Loss Ratio can range from 70% to 88%, signifying 12-15% administrative costs”.

Financial institutions have an effective transaction processing system. Over the years, they have constructed secure and highly networked payment systems to manage different types of payments (credit and debit cards through non-card transactions).

Consumerism is a vital upcoming concept in the healthcare sector. For banks and financial institutions, the opportunity is in the progress towards consumer-directed health plans (CDHP), by developing specific healthcare accounts – HRA, FSA and HSA.

CDHP puts the onus on the consumer to comprehend their health care requirements and use their finances appropriately. CDHP accounts financed by employers and/or members are usually supplemented by a normal health plan which has high deductibles from payers.

Consumerism has spread multiple structural needs throughout the payer sector. The members require tools to make informed decisions.

Claims could get reimbursed through various funding sources. The future of the healthcare sector depends on the improved interface between banking systems, infrastructure, and credit with healthcare administrative functions.

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Impact of Social Media On the Banking Sector

In the last decade, growth in the social media has been significant. It has become a vital aspect of several business entities, including the banking sector. It plays a vital role in several banking functions including customer acquisition, product sales, decision analysis, and credit scoring among others.

Some of the areas of concern for banks to use social media include:

  • A shift in banking operations to online and mobile can be complex.
  • Increase in operational costs.
  • Transformation in the way banks operates to facilitate customer engagement among others.
  • Absence of sufficient regulatory guidelines.
  • Risks related to social media.

Banks are changing from establishing a presence in the social media to utilizing the social media for operations.

Banks are implementing a customer-oriented method and customers are increasingly leveraging the social media for its services. For e.g., customers can access the social media for payment transactions, thereby avoiding internet banking portals.

Some of the banks are furnishing simple internet banking competencies using Facebook connected bank app login. Bank apps enable customers to communicate with bank personnel on products/services. Transactions through social media are still a niche segment. Megabanks are looking to expand and scale upwards on current platforms to deliver diverse products and services.

Sales, marketing and customer service nerve centres have been revamped to interface with customers through the social medium.

Some of customers’ social banking preferences are as follows:

Information

  • Location of the branch/ATM.
  • Campaigns for products.
  • Service information.
  • Rewards program.
  • Advice from banks.
  • Security alerts.

Transactions

  • Account status.
  • Balance information.
  • Biller payments.
  • Apply for products.
  • Update account information.
  • Credit processing.

Servicing

  • Service request submission.
  • Chat with the advisor.
  • Knowledge sharing.
  • Community interface.

The digital revolution has impacted consumer behaviour and modified behavioural aspects based on technological modifications.

The new generation of consumers wants social media to provide a unique banking experience. They want banks to deliver transactional processing competencies, thereby facilitating self-service instead of linking to websites.

A transparent social strategy is vital to ensure proper acceptance by customers. Some of the critical factors that need to be looked at while creating the social strategy:

Technology

Establish a relevant platform to create and manage the social media applications. Leverage the social analytical tools/big data technologies to enhance social listening.

Enhancing Competencies

Banks that are new to social media must look at enhancing competencies such as information, transactions, and servicing among others.

Risk Management

Social media provides an opportunity to improve banking operations. However, comprehending the risks and establishing an effective mitigation mechanism is vital.

Consumer Interest Safeguard

Social media governance is going to play a key role in implementing the social strategy in banks. Banks must understand the risks pertaining to personal information sharing in the social platforms.

Customization and Personalization

They would be the critical factors in evaluating a bank offering through social media. Currently, a static page on Facebook providing information on bank products is very basic, but in the future, collaborative customization would become vital.

Customer service personnel would be supported by smart chat tools that can conduct customized needs analysis.

Social media is going to transform the way banking is looked at. Innovation in social strategy is becoming the norm. Banks should also look at new models to expand organically.

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Financial Disintermediation in Global Banks

Financial disintermediation is the investment of funds (that would under normal circumstances have been deposited in a bank or financial institution) into financial instruments provided by those using the funds. The investors, as well as borrowers, conduct business transactions without the support of banks/financial institutions.

According to experts, global banks funding structures are moving simultaneously, with a steep and continuous decrease in funding on the whole. Disintermediation has become significant in the financial markets due to an increase in utilization of securities to secure capital from the capital markets instead of the banks.

Under normal circumstances, banks perform the role of a financial intermediary for debt, borrowing/lending. The process of selling securities (bonds) by avoiding borrowing enables a borrower to receive funds from the investors directly. The widespread use of financial instruments like asset- backed securities and convertibles have facilitated this.

The increase in disintermediation decreases the business opportunities for commercial banks while enhancing the scope of capital markets. It increases the business opportunities for investment banks directly and for other investment stakeholders (brokers, fund managers) indirectly.

Borrowers would be able to secure funds at a lower rate due to disintermediation. Investors have to forgo the security of bank deposits, but they are assured of improved rates of return.

Investors have to manage risk through various mechanisms of diversification along with the identification of relevant investments. However, disintermediation removes the bank’s interest margin and the gain is shared by investors, borrowers and other investment stakeholders.

Global banking is illustrated by cross-border fragmentation. Cross-border bank claims are shrinking in the recent past. Again, the decrease of cross-border interbank claims is significant, while cross-border claims in comparison to non-banks have also been restrained. However, the increase in non-financial corporation’s global debt issuance has been sustained.

The global banks funding structures are migrating simultaneously to cross-border bank deleveraging. Wholesale funding is shrinking due to a transition to secure funding opportunities. The transformations in a bank’s funding pattern are significant in the financial centres.

Banks global net issuances are decreasing clearly overall while cross-border interbank liabilities are also reducing. Banking activities through the international financial centres remain low. Regulatory reforms have become the key factor.

The trend of moving towards secure funding models is expected to be permanent in the long run according to experts. International banks, which have established branches across global destinations through regionally funded and capitalized subsidiaries have become more robust.

On the other hand, international capital markets are expanding expeditiously. International issuances – bonds provided by non-residents across markets have increased, especially in emerging economies.

Disintermediation is also taking place at the corporate level across the globe. The corporate has migrated from bank loans to funds from the bond markets.

An area of concern is that markets tend to overprice before settling down at the right price. There has been historical evidence of the financial crisis due to the banks being replaced by the capital markets in securing funds. Though there are risks associated with disintermediation, the role of banks as the financial hub would continue to diminish.

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Blockchain Technology and Banking

The blockchain or distributed ledger is a documentation of digital actions that are shared among various stakeholders. It can be modified only upon an agreement from most of the stakeholders in the system.

Once information has been recorded, it cannot be removed. Hence, the blockchain consists of specific and validated documentation of each transaction executed. This implies that digital records can be maintained safely, despite the absence of a central authority.

Several banks, including Citigroup, Barclays, and UBS Bank are looking at options for using blockchain technology for cross-border payments. They are strategizing the process of integrating within the current system.

Some of the key benefits of blockchain technology are:

Security

Since the blockchain is spread across several computers, hacking is very difficult. It reduces the need for a server maintenance and enhances the bank’s overall security.

Transparency

The provider and the receiver for each transaction are highlighted and all transactions are in the public domain for scrutiny. The blockchain provides details on the circulation of money across the financial system, along with the markets into which it moves.

Privacy 

Since the users are not known, they can transmit money expeditiously and safely. This enables banks to decrease the processing time and reduce the costs of global transactions.

Risk

Control is not with any distinct authority. Therefore, for any issue, the remaining aspect of the network would continue to operate. At present, if a bank’s system shuts down, users cannot conduct transactions, while by establishing blockchain technology, the bank’s system would function normally.

 Eliminating inefficient banking intermediaries

This could result in significant savings for the consumers and the financial services sector.

According to a report by Accenture, “Asia-Pacific (APAC) banks, credit card firms and startups can be expected to increasingly focus on blockchain technology in the coming years. It also stated this trend would coincide with the need for FinTech firms to streamline operations and comply with regulations. As a stand-alone technology, blockchain could help banks, credit card companies, and clearinghouses collaborate to create safer, faster accounting and optimize capital use by reducing counterparty risk and transaction latency”.

As per experts, the applications are of various types including capturing client information, managing cross-border payments, clearing and settling bond/equity trades, and facilitating efficient contracts (credit derivative) that release funds automatically if a firm is bankrupt.

According to a report by Spanish bank Santander, management consultancy Oliver Wyman and venture capital investor Anthemis, “The technology could cut banks’ infrastructure costs for cross-border payments, securities trading, and regulatory compliance by $15bn-$20bn a year from 2022”.

For megabanks looking at opportunities to revamp the traditional IT systems due to pressure from regulators, digital, and cybercriminals, the blockchain provides an opportunity to reassess their strategy.

The capability of the technology to deliver a lasting record of status, which includes the timeline of a person’s transaction is one function with potential. Intermeshing records can be effective, according to insurers in verifying a person’s actions.

Several financial institutions are trying to evaluate if the blockchain technology provides a cost-cutting option or reflects a margin-eroding risk. Many banks have created internal models, for e.g., Citigroup has developed Citicoin (a digital currency that is being validated by its QA process).

Some have developed in-house models, such as Citigroup’s creation of Citicoin, a digital currency being tested in the bank’s laboratory. Others have chosen to invest in a specialist: Goldman Sachs initiated a $50m funding on behalf of Circle Internet Financial, which would utilize the bitcoin to oversee consumer payments.

Another option is through a partnership. Commonwealth Bank of Australia has collaborated with open source software provider (Ripple) to construct a blockchain system for payment transactions among its subsidiaries. Banks such as Barclays and UBS are interfacing with the blockchain startups via a technology incubator.

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The Federal Reserve Is Nervous About Its Rate Policy

Market analysts were surprised when the Federal Reserve did not change the interest rates in the first week of May 2016.

The Fed was assessing inflation indicators, international economic & financial growth and the impact on the labour market. However, some experts believe the Federal Reserve forecasts are unrealistic.

According to Peter Boockvar, Lindsey Group Chief Market Analyst, “the Fed will never get the perfect conditions they seek before increasing short-term rates once again. The Fed’s mandate isn’t to have a perfect world. That only exists in fairy tales, dreams and in your econometric models”.

The Federal Reserve has been following an accommodative monetary policy for a long period. The strategy of expanding the money supply (lower interest rate) is to bolster economic growth by encouraging consumers and companies to increase their expenditure.

The Federal Reserve has been receiving suggestions from weak global banks, and therefore, there is a reason for ensuring the interest rates stay low.

Again, the Fed is transferring its emphasis to apprehensions pertaining to global development. The Fed had stated in March 2016 that international economic and financial growths remain risk prone, though there seems to be a change in the perception recently.

The decision makers in the Federal Reserve are coming up with various excuses without initiating any rate hikes. The Federal Reserve has been following an expansionary monetary policy for nearly eight years, but they have increased the interest rates only once. Hence, experts believe “the Federal Reserve is nervous about its rate policy”.

It’s a complex environment to be in and the Fed does not have a solution to resolve the issue. There have been several policy failures in the past which have contributed to the current scenario.

Some experts believe the central banks are facing a credibility crisis because of the inability to create greater asset prices, resulting in the stock market volatility.

Industrial production in the US has been slow because investors are not sure about making an investment due to uncertainty. Extensive regulation and the apprehension pertaining to the US election are also contributing to the negative sentiment.

In a global economy that is already being impacted by high debt, the cost of money is not a critical factor and it is not a mandatory restriction on any stakeholders’ decision making. At present, there is a requirement to take policy decisions on the direction of interest rate and excess liquidity in the market. However, such a policy decision by the Federal Reserve is going to take a very long time.

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OPEC Infighting and The Role of The US as A Swing Producer

Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization (13 countries), established in 1960 by the primary five members, and headquartered in Vienna, Austria from 1965.

OPEC produces 40% of the international oil and accounts for 73% of the global  “proven” oil reserves”. OPEC has a key impact on the international oil prices.

The members of OPEC had a meeting on April 17th, 2016 to decide on capping oil production to bolster prices.

They could not arrive at a consensus, raising doubts regarding the cartel’s continuation as the global energy swing producer; providing an opportunity to shale producers based in the US to take over the leadership position.

According to Dan K. Eberhart, CEO, Canary, LLC, and an expert on the U.S. and international energy policy, “It’s a distinct possibility. For decades, OPEC has set the global price of oil by controlling supply. But with shale production cutting drastically into OPEC’s market share, the cartel’s dominance has been in decline. Saudi Arabia, OPEC’s de facto leader, needs that market share”.

Saudi Arabia is initiating a strategy to compete with the US and other non-OPEC oil producers. However, if oil prices continue to be low, Saudi Arabia, which is the largest oil producing OPEC nation must restrict supply to increase prices.

Ensuring the market share is maintained is also pivotal for the continued dominance of OPEC. Market analysts believe, Iran’s influence is on the rise. OPEC experts felt the cartel would definitely freeze production to hike oil prices, but the cartel could not reach an agreement because Iran did not attend the meeting.

Ever since the West lifted the sanctions on Iran, the nation has increased its production to over 3.1 million barrels per day. Saudi Arabia urged Iran to accept the planned freeze. Iran’s non-conformance with the cartel’s decision resulted in the collapse of the deal.

This has provided an opportunity to shale producers in the US to play a dominant role in the global energy sector.

Any increase in oil prices is positive news for the shale producers in the US. Their improved efficiency in operations means, break-even prices have fallen, and production continues to improve (with substantially fewer rigs).

Again, an increase in prices would make mothballed rigs operational, thereby cutting into OPEC’s share. In fact, the spike in oil prices that led to shale production becoming commercially feasible was largely due to the OPEC’s decision to reduce the supply.

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