Eiichiro Yanagawa

About Eiichiro Yanagawa

Eiichiro Yanagawa is a senior analyst with Celent's Asian Financial Services group and is based in the firm’s Tokyo office. His research focuses on IT strategy issues in the Japanese and Asian banking and financial industries. His recent research has included core banking systems, ATMs, anti-money laundering technology, electronic trading, document management, IT spending trends, and business process outsourcing. Eiichiro's consulting experience includes development of bank IT strategies, thin client / desktop virtualization to support business continuity, evaluation of data centers for hosting core systems, and vendor selection of AML, risk management, and other technologies.

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 3

  (Source: East Japan Railway Company)

Leverage Digital Technology

In the banking sector, players should strive to become trailblazing purveyors of financial services that leverage digital technology.

There are areas in the banking services value chain where firms should work independently to generate unique, in-house, high-value-added services and products; there are also areas where banks stand to benefit by collaborating with other firms to drive down costs. Also, firms should consider collaborating with other firms to leverage economies of scale and economies of scope, parlaying cost centers into new profit centers, and securing a role in the industry infrastructure.

In actual operation, after deliberating and implementing such initiatives, big-data analytics and the automation of all processes will prove the most important. Here as well, a shift to a modular supply structure will be required, and a critical factor in determining the success of financial institution management will be alliances — namely, how adroitly firms partner with other entities.

In Conclusion

Celent offers the three points below as food for thought and policy prescriptions for modernization in the banking industry.

1. Technology as a driver of growth:

  • Look for ways to pioneer new segments through the use of technology without fixating on the segments that have been your bread and butter up to this point.
  • For example, robo-advisors can be used not only for mutual fund but also for insurance products sales to retail customers. Bancassurance and alternative distribution channels should also be driven by robo-advisors.

2. Vertical disintegration:

  • Prioritize finding the sweet spot for cost and risk and revisit and rethink your processes (such as vertical integration and/or internalization, and the use of horizontal division of labor and/or outsourcing) across the board.
  • For example, enhancing the agility of new payment product research and development might be achieved by vertical disintegration of banking business into payment services discovery, development, and marketing organizations.

3. Industry-wide priorities:

  • Place top priority on initiatives to raise financial and IT literacy among customers.
  • Actively seek to leverage monetary policy and system reform as business opportunities; avoid a passive approach to system reform.
  • Rebuild the industry value chain through methods of modularization, specialization, and integration.

Legacy modernization in the banking industry is much more than simply the application of novel technology. Rather, it portends nothing less than a structural overhaul of the banking industry, an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that this transcends the mere establishment of a digital channel; rather it will certainly impact products, services, IT units, and sourcing models, and, in so doing, provide the banking service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

Celent perceives legacy modernization in the banking industry as instigating change at a fundamental level, in both business execution and organizational structure. Moreover, this transformation promises to have legs and vast implications that will play out over the long haul. Legacy modernization is much more than just new technology and it will have sweeping implications.

 

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Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 2

  (Source: Charles Schwab)

The Banking Industry of the Future

The securities industry can be regarded as the first sector in the financial industry to have embarked down the path of modularization. Mutual funds was the first major area involved in this first step toward modularization. Mutual funds are now mainstream products of banking and wealth management. The banking industry should not overlook the following episodes.

The mutual fund business model can be broken down into two process areas: 1) selecting investments or investment destination (portfolio building), and 2) sales of the created mutual funds. In the former, the products (portfolio) are designed and created (produced), while the latter involves the sales of investment firm securities (mutual fund beneficiary certificates), with sellers undertaking the office processing such as customer transaction reports.

In the closed model era of brokers and mutual fund firms, the norm until the 1960s, mutual fund firms would outsource sales to securities companies (full service brokers). This resulted in mutually beneficial consignment-based relationships between the investment trust companies and securities firms that endured for a long time with a fixed fee structure (investment sales commissions paid from the customer to the securities company) and securities trading fees (paid by the mutual fund company to securities company). These sales formats have since diversified.

No-load funds entered the market starting in the 1970s, spurred on by the liberalization of commissions for the brokering of securities, sluggish demand in the stock market, and the emergence of discount brokers that did not offer investment advice. This era was characterized solely by diversification of sales methods, and was entirely absent changes to the closed model that covered planning, manufacturing, and sales.

However, change descended on the market in the form of the mutual fund supermarket revolution. With the launch of Mutual Fund OneSource in 1992, Charles Schwab offered multiple funds that customers could purchase without paying a commission, but for which Schwab’s mutual fund management arm collected an annual management fee based on asset balance. Metaphorically speaking, this approach was akin to companies putting mutual funds on the shelves of a supermarket and charging commissions only for the products sold. The interface between mutual fund companies and securities companies opened up, and the creation and sales components were decoupled and functionally modularized.

More change is on the horizon. An era is coming in which the banking industry should orchestrate a shift to a structure that hinges on modular demand to respond to new needs fostered by digital technology and the new demand of the emerging digital generation.

Industry players should be ditching vertically integrated direct sales, or so-called keiretsu, which are tantamount to direct sales routes; instead, they should establish delivery models that are more dynamic and open. Omnichannel initiatives are not only opportunities for firms to launch or shut down these channels, but also to revisit and reconsider their optimal delivery model. Moreover, collaborating with non-financial sector players, including start-ups, opens the door to the possibility of accessing vast and new untapped market frontiers.

Robo-advisor initiatives can be expected to accelerate the speed of advances in modular demand structure. Presumably, coming delivery channels will seek to optimize information and investment expertise, driven by approaches that respond to the needs of investors by providing automated advice and harnessing bankers as human support mechanisms.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY

  (Source: Apple)

Modularization of Industry

Industries across the board are undergoing structural change. This change extends beyond individual firms and spills across industrial sectors. Some industries that have been exposed to the tide of technology-driven structural changes have harnessed technology to reinvent themselves as new industries befitting this evolution in industrial structure. The financial industry traditionally has been far from the vanguard of this change.

The proliferation of the Internet and digital technologies is only accelerating the evolutionary shift across all industries. This stands in stark contrast to the traditional non-modular, vertically integrated structure (where all the products and services are provided through and within one exclusive value chain) that the industry has historically embraced. However, disruptive new market players have visibly forced conservative, existing entities to begin to seek new approaches; at the same time, regulatory authorities have started to embark on establishing a new, more robust system for regulating the financial industry.

The hotel industry offers a prime example of modularization on the demand side. Today, hotels, as well as the entire travel industry, offer consumers the experience of comparison shopping across service, price, and quality. Celent refers to this phenomenon as modular demand.

Modularization on the supply side is perhaps best exemplified by the aviation industry. The aircraft industry intrinsically does not lend itself to being a self-contained business, relying on a variety of actors to make, operate, and commercialize aircraft. Technological innovation, deregulation, and cost pressures transformed the airline industry, spurring it to evolve into a quintessential modular structure on the supply side.

This modularization goes beyond the industry infrastructure that includes airports and ground facilities. All components of the value chain — from in-flight services such as meals and movies to ground services such as boarding and baggage handling, as well as aircraft maintenance, flight plans, management, pilots, and cabin attendants — are now all subject to external procurement. The airline business now hinges on corporate management’s adeptness at forging and managing alliances. At Celent, we refer to this phenomenon as modular supply.

Today’s music industry showcases some of the greatest modular advancements. On the demand side, the industry saw a shift in the listening experience, as consumers moved from CDs to online downloads and streaming. Dramatic technological advancements have enabled music distribution sites and social networking services to tailor recommendations to users, offering songs and videos to suit music preferences and enabling consumers to search for, purchase, and enjoy music in real time.

On the supply side, record labels and their vertically integrated model were initially largely blindsided by innovation because musicians no longer needed to rely exclusively on CD sales or being scouted, signed, recorded, and promoted by record companies. The ensuing change saw a shift to a new model where a diverse range of artists recorded themselves and harnessed social media and trendsetters to promote their colorful charm and generate fans. Both the supply and demand sides of the music industry value chain underwent a dramatic upheaval that shook the industry and spawned a more dynamic and open industry. This resulted in a new life for the music industry that relegated the CD and conventional business practices of music labels to history.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

WHAT DOES IT MEAN TO MODERNIZE? (Part 2)

Enhanced Risk Management: Realizing a Dynamic Risk-adjusted Investment Cycle

One element that is consistent across capital markets in any age is a fervent desire to pursue alpha couched in efforts to optimize risk, all of which finds a point of equilibrium as determined by the market. Today all market players pursuing modernization are doing so in an environment that is subject to the below common factors.

  • Diversification of trading product (asset class) and trading method (execution method)
  • Deployment of new frameworks for securities settlement and margin trading
  • Volatility in cash, leverage, and particularly liquidity
  • Continuous strengthening of capital requirements 

As regulatory scrutiny intensifies and investor expectations for investment alpha rise, buy side financial institutions are being pushed to modernize their management functions in ways that accommodate their investment strategies with advanced levels of diversification, defensiveness, and risk transparency.

Looked at from the perspective of investors, it is clear that in addition to the deployment of advanced operational methods and superior investment strategies, that to execute these new ideas it is imperative that firms develop the capabilities needed for robust operation and risk management. Indeed, these investor expectations are likely a more daunting prospect than the stress tests and other regulatory requirements.

To perform well in today’s capital markets, Celent has advocated the need for excellence in business operations—in other words, the establishment of effective risk management and control[1]. Toward this end, it is imperative that companies destroy institutional barriers and silo-riddled organizational structures, understand regulations and risks in the context of the market, products, and trading, and seek to strengthen their organizations with an eye to securing greater transparency.

Until now, finance (funds management or capital management) has been carried out in silos, spawning competing control and management initiatives. This is proving increasingly untenable and driving the need to better integrate finance with governance, risk management, and compliance—what Celent refers to as GRC. In the meantime, the costs only continue to surge both in terms of time and money stemming from confusion related to information transmission and the value chain.

What is the best path forward?

To accurately gauge the magnitude of this issue requires a firm awareness and comprehension of the facts, but today the management of risk and finance, processes, data, and technology are fragmented. This spaghetti-like situation and disparate nature of data routes and management systems slows business processes and obscures the reality of the issue itself. Action is urgently needed to establish data flows that cut across risk and finance as well as to create agile front office control and strive for enhanced portfolio optimization.

In addition to bringing together the three elements of data—establishing a set degree of data freshness, data quality, and data routes—it is similarly imperative to integrate seamlessly front office trading systems (OMS), portfolio management (PMS), risk management, and capital management mechanisms.

The approaches taken demonstrate the limits of long-implemented stop-gag measures implemented to meet regulatory requirements. Put another way, to heighten effectiveness, there is a need to overhaul both business and technology architecture.

Management of Risk and Finance: Disparate Processes, Data, and Technology

Celent helps buy side organizations in the market today modernize their risk management—which is to say, implement initiatives to improve the effectiveness of their risk management. Celent does this in part by using the below six items as a conceptual framework to get a handle on the situation, research available solutions, and then offer advice on implementation.

  1. Understanding regulation and risk that accommodate the market, products, and trading: What is the backdrop or context and what changes are on the horizon?
  2. Integrating regulation and risk management with control functions: What targets should be integrated?
  3. Unifying risk data and risk value chain objectives: Which data and processes should be redefined?
  4. Selecting architecture and components aligned with objectives: Which solutions should be chosen?
  5. Securing mobility and flexibility in data management and platform strategies: How should the solution build be implemented?
  6. Rethinking business processes to achieve consistency with risk management: Where are the ancien régime legacy elements that hamstring business modernization?

 

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Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2


New Hybrid Digital Bank, PurePoint™ Financial

This development marks a true milestone in terms of the global development of Japanese banks.

We have already seen Japanese insurers using M&As as they seek to internationalize their operations, including telematics-based auto insurance, as they enter the fray in cutting-edge financial services in mature markets.

Until now, overseas expansion in Japan’s banking sector has typically started with transaction banking and hinged on wholesale operations (trade finance, foreign exchange, and investment banking services to support the overseas development activities of Japanese companies).

This initiative signifies an expansion into retail operations of locally incorporated subsidiaries in North America with which the bank has a long history and abundant goodwill. This initiative will also provide valuable feedback that can be applied to the Japanese market. To succeed in this market will require meeting the needs of the millennial generation with state-of-the-art technologies such as IoT and AI and conducting operations in a way to develop next-generation digital financial services.

 

S&P Global Market Intelligence:  Mitsubishi UFJ Financial seeks stable dollar funding with new US online biz

NIKKEI: Mitsubishi UFJ expands in US with online banking

 

Celent Report Recommendation: Defining a Digital Financial Institution: What “Digital” Means in Banking

 

ハイブリッドデジタル銀行:ピュアポイント

またひとつ、本邦金融機関によるグローバル展開のマイルストンが刻まれた

既に保険セクターではM&Aによるグローバル事業展開が進んでおり、テレマティクス自動車保険をはじめ、成熟市場における最先端の金融サービスへの参入が始まっている。

これまで銀行セクターの海外展開は、トランザクションバンキングを筆頭に、ホールセール業務(なかでも、日系企業の海外展開を支援する貿易金融や外国為替、投資銀行業務)が中心であった。

本取り組みは、長い歴史と強い暖簾を持つ北米現地法人における個人向けリテール業務の展開であり、その挑戦と成果は、日本市場へこれまでにないフィードバックをもたらすであろう。

ミレニアム世代のニーズにマッチしたIoTAIなど最先端のテクノロジー活用と、相応しい事業体の運営による次世代デジタル金融サービスの展開が大いに期待される。

 

関連したセレントレポートの推奨:

バンキングにおける「デジタル」とは何か

日本の銀行業界におけるレガシー・モダナイゼーション パート2:銀行業界への提言

 

– Click to read more

 

 

 

JAPAN’S REGIONAL BANK CONSOLIDATION

This is just the beginning of a battle for survival in the red ocean.

The intense competition is not the result of financial authorities' encouragement but rather grows out of the zero interest policy and resultant alteration in the operating environment.

Japan's banks have already been striving to raise efficiency by consolidating their core systems.

Now what they need to focus on is leading the digital initiative, which can be adaptable to diversifying needs, rather than focusing exclusively on gaining broader market to increase ROE.

New markets and customers should be calling for innovative financial services.

Setting and implementing a new strategic framework that has not existed up until now is key to success in this era.

 

S&P Global Market Intelligence: Japan's regional banks under pressure to seek scale for survival

Nikkei: Japan's regional bank consolidation gains momentum

 

Related releases:

(JP) Legacy Modernization in the Japanese Banking Industry Part 2

(JP) Legacy Modernization in the Japanese Banking Industry Part 1

English version will be forthcoming shortly!

 

WHAT DOES IT MEAN TO MODERNIZE? (Part 1)

In Order to Modernize

Before proceeding any further, let’s pause to consider what core system modernization signifies to a brokerage firm. Celent surveys have found that to brokers modernization means agility in operations and reductions in IT costs.

This prompts the question of how to make modernization a reality. Celent focuses on two jumping off points or angles from which to approach this: One is trading lifecycle optimization (TLO), the second is improving risk management, that is to say, realizing of a dynamic risk-adjusted investment cycle.

Trading Lifecycle Optimization (TLO)

The digital advances in trading environments have spurred the proliferation of algorithmic trading and high-frequency trading (HFT), developments that have reduced the number of traders needed. At the same time, Asia has witnessed increasing fragmentation that is particular to the regional market, spurring the spread of smart order routing (SOR).

Social media and big data are increasingly being used as market data and exerting greater influence on the market at the same time that high touch sales by sell-side firms remains. In addition, increasing diversification is evident with significant variation in the degree of digitization across asset classes and markets, and in terms of liquidity and trade type (bulk, block order, small orders, etc.).

Against this backdrop, a new electronic “hybrid” trading that fuses traditional high-touch trading with HFT and algorithmic trading has emerged in modern capital markets and trading environments. This has extended technology application beyond traditional areas of focus such as trade execution management and portfolio management. Indeed, the role and importance of technology is only growing, particularly in these areas: linking pre-trade compliance in order management, post-trade compliance in the middle office, and the various financial intermediaries (account keepers, transfer agents, administrators, prime brokers) that work across the front, middle, and back offices.

Celent has advocated the concept of trading life cycle optimization (TLO)[1].

TLO has come under scrutiny due to market environment changes that traders face in addition to factors including disparate or unevenly distributed trading technologies as well as trading risks (time, location, asset class, trader).

Hybrid trading environments combining traditional high-touch trading with HFT or algorithmic electronic trading, could clearly serve to benefit from TLO. Spanning the trading process—before, during, and after trading—it is vital to integrate across administration, monitoring, and auditing metrics for governance, risk, and cost (GRC). This makes extremely important to harness market data, which can serve as criteria for TLO.

Trading Lifecycle Optimization (TLO):

Areas targeted for optimization by trading technology block (types of technology used) can be broken down into the following four: infrastructure, operation, trade execution, and allocation.

These technology blocks are very important such as when it comes to audit requirements, sponsor descriptions, trader performance reviews, and identifying automated and discrete ranges. At the same time, these are also seen as crucial functional requirements for the front, middle, and back office systems in next-generation trading.

Celent believes that trading technology modernization should mean for both the sell side and buy side a focus on amending disparity and gaps in this technology.

To be continued – Click to read more

 

Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2


 

WHY MODERNIZE?

Celent has consulted on many securities firm legacy modernization projects. At the outset of these projects, Celent asks the CEO and CIO a number of questions similar to those below.

CEO Questions:

  • How much time and money were required the last time your firm had to rework connections to exchanges, settlement and verification institutions, clearing and settlement institutions and respond to system reform?
  • What is your average cost per transaction? What is your average cost per customer?
  • How many systems must a call center staff member access to answer customer questions? What is the average time required? The average cost?
  • How many staff members are required to work on applications to open a new  account? How many systems must be accessed?
  • What are the foreseen costs and risks associated with outsourcing IT department operations?
  • What are your legacy systems and what are candidates for modernization?

CIO Questions:

  • What was the volume of code that need to be modified the last time your firm had to rework connections to exchanges, settlement and verification institutions, clearing and settlement institutions and respond to system reform?
  • How easy is it for you to integrate existing and new applications?
  • Are you spending more on maintenance or new projects?
  • Is your IT certainly capable of supporting new business acquisitions?
  • How many systems are there for risk management, compliance management and reporting to authorities? How much are your costs to maintain your IT?
  • Do you have any maintenance contracts that will be ending soon?

These are among the questions that executives need to ask themselves when they look to tackle IT challenges (e.g., data model rigidity, lack of application flexibility, IT duplication, and associated labor efforts). If you already know the answers to these questions, then the typical challenges securities firms face spelled out in this post likely do not exist for you. The issues broached here are not the kind of challenges that can be resolved by improving peripheral systems or patchwork core systems solutions.

For financial institutions that have designed, developed, operated, and maintained core systems themselves, formulating a replacement strategy is akin to putting together a plan to travel to an unknown world. Such a situation requires correct understanding, which mandates a bird’s-eye view or systems map of the entire firm (as-is state) coupled with recommendations for the system to be (to-be state).

Moreover, companies must select the solution that best matches their needs from existing solutions in the market. The key is the business requirements document (BRD). This means defining the operational functions and system requirements that will satisfy the next system’s needs. Often, understanding the current situation accurately is not easy, the ideal system goes unrealized, and companies end up with something approximating a reproduction of the legacy system. Thus, it is crucial to distinguish between the legacy and modern systems.

Legacy Systems and Modern Systems: A Comparison:

To be continued – Click to read more

 

Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2

Digital Transformation of the Securities Industry in Japan and Asia

Modularization of Industry

Industries across the board are undergoing structural change. This change extends beyond individual firms and spills across industrial sectors. Other industries that have been exposed to the tide of technology-driven structural changes have through the process harnessed technology to be reinvented as new industries befitting this evolution in industrial structure. The financial industry traditionally has been far from the vanguard of this change.

The proliferation of the Internet and digital technologies is only accelerating the evolutionary modular shift across all industries. This stands in stark contrast to the traditional non-modular, vertically integrated structure (that is to say, the antithesis of a modular structure, where all the products and services are provided through and within one exclusive value chain) that the industry has historically embraced.

However, disruptive new market players have visibly forced conservative, existing entities to begin to seek new approaches; at the same time, regulatory authorities have also started to embark on establishing a new, more robust system for regulating the financial industry.

The Securities Industry of the Future

The securities industry can be regarded as the first sector in the financial industry to have embarked down the path of modularization. A major area that has been involved in this first step toward modularization has been mutual funds.

In the closed model era of brokers and mutual fund firms, which was the norm until the 1960s, mutual fund firms would outsource sales to securities companies (full service brokers). Then, the market witnessed the emergence of no-load funds starting in the 1970s. This era was characterized solely by diversification of sales methods, and was entirely absent changes to the closed model that covered planning, manufacturing, and sales. Finally, change descended on the market in the form of the mutual fund supermarket revolution. Metaphorically speaking, this approach was akin to companies putting mutual funds on the shelves of a supermarket and charging commissions only for the products sold. The interface between mutual fund companies and securities companies opened up, with this the creation and sales components were decoupled and functionally modularized.

The Role of New Technology: Robo-advisor

Robo-advisor initiatives can be expected to accelerate the speed of advances in modular demand structure. Presumably, coming delivery channels will seek to optimize information and investment expertise provided, driven by approaches that respond to the needs of investors by sometimes providing "automated advice" and sometimes harnessing brokers as "a human support mechanism.”

In Japan, megabanks, startups, and dedicated online brokers are all jockeying to leverage their strengths in a way that accords them the most advantageous position possible. Their robo-advisor initiatives so far largely appear tailored to support the sales of mutual funds. As easy-to-use, non-face-to-face channels, they are garnering interest from investors with a level of comfort with IT and a degree of financial literacy. Moving forward, further advancements that draw on both the asset management facet and technology are expected in the 4 areas; diversity of products, diversity of services, automation, accommodating B2B.

Excluding Japan, Hong Kong, and Singapore, Asia is a fragmented market for retail investors, and therefore it’s still inaccessible. In addition, such markets as Taiwan and Korea are showing an increase in home bias. Thus, how the robo-advisor business thrives in the Asian market will depend on its distribution dynamics, along with its asset growth potential and product development.

Legacy modernization in the securities industry is much more than the application of novel technology. Rather, it portends nothing less than a wholesale structural overhaul of the securities industry that is an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that this transcends the mere establishment of a digital channel; rather it will certainly impact products, services, IT units, and sourcing models, and, in so doing, provide the securities service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

 

Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2

Fintech and Robo Advisors: Booming in Japan

Legacy Modernization in Japan’s Financial Industry, Part 2: What the Auto Industry Can Teach the Financial Sector