Reflections - Cognizant
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Reflections - Cognizant

September 2010Cognizant Community 2010:Thriving in the ‘New Normal’:A Roundtable DiscussionBusiness Process Outsourcing:Why Holistic BPO Delivers Better ResultsUI Breakthroughs:Transforming the User Experience Acrossthe Financial Services EnterpriseSecurities Trading:Why Unified Risk Management is aMust in the Reset EconomyLending Services:Mortgage-Loss Mitigation: A Proactive ApproachSEPA & MiFID:Rethinking the BusinessModel at European Banks

Reflections is a thought-leadership journal published by Cognizant. Our mission is to provideunique insights, emerging strategies and proven best practices that globally-minded financialservices companies can use in their quest for business and IT performance excellence.Our editorial board is chaired by Rao Peddada, Vice President, Cognizant Banking & FinancialServices and includes Curt Girod, Vice President, Business Consulting; Pradeep Hardikar, AVP,Business Consulting; Alan Alper, Director, Corporate Marketing; and Lisa Stapleton, SeniorManager, Field Marketing.All articles published in Reflections represent the ideas and perspectives of the individualCognizant associates and contributors who have documented expertise in business-technologystrategy and implementation. The content of the articles published in Reflections representthe views of the individual contributors and not necessarily those of Cognizant. They are putforward to illuminate new ways of conceptualizing and delivering global services forcompetitive gain. They are not intended to be, and are not a substitute for, professionaladvice and should not be relied upon as such.For more insights, and to continue the conversation online, please visit oure-community at© Copyright 2010, Cognizant Technology SolutionsNo part of this publication may be used or reproduced in any manner whatsoever without written permission of Cognizant.

Table of Contents4Editor’s Note5Thriving in the ‘New Normal’:A Roundtable Discussion11Why Holistic BPO Delivers Better ResultsBy Ramesh Ramani17Transforming the User Experience Acrossthe Financial Services EnterpriseBy Siva Visveswaran and Makarand Pande24Why Unified Risk Management is a Must inthe Reset EconomyBy Sudhir Gupta and Anshuman Choudhary29Mortgage-Loss Mitigation: A Proactive ApproachBy Ashish Shreni and Nate Longfellow35 Rethinking the Business Model at European BanksBy Sanjay Bhanot

■ Editor’s NoteRethinking OperatingModels Across the GlobalFinancial Services IndustryChange appears to be the only constant in the global financial services industry and we anticipate the paceto accelerate. At Cognizant, we continually follow developments in industry structure and business modelsand analyze their impact on technology and operations. Reflections is one channel to share our insights andexpertise with our clients and to initiate a dialogue to respond to these changes.Some changes are obviously driven by the immediate aftermath of the financial crisis. Banks and publicfinancial institutions are still in the midst of rationalizing their balance sheets and their primary and secondarylending operations. Regulatory overhaul is expected to continue following the G-20 meeting in Toronto earlierthis year, which set the direction for recovery from the recent global recession and the still-evolving Europeandebt crisis. Already in the United States, the Obama administration has passed a sweeping overhaul of thefinancial services system which is expected to affect almost all banking and capital markets participants.Perhaps less obvious are forces that are reshaping underlying business models. These include the rise of thesocially-networked consumer, the impact of the “Millennial” generation, and the continued acceleratedgrowth of emerging markets. On the supply side, increasing adoption of new technologies and processenablers (e.g., mobile banking, rich Internet interfaces) and highly-globalized delivery models are providingsignificant potential to reduce operating costs amid rising competition from non-traditional players.Our latest issue of Reflections offers our perspective on the impact of these changes on products, servicesand operating models in driving growth while ensuring regulatory compliance. We open with an examinationof the major trends driving change across the financial services industry. Next we offer a more creative andproductive way to holistically embrace business process outsourcing and illustrate how improvements inuser interfaces can facilitate better online customer experiences. We also examine a unified approach tosetting up a credit and market risk infrastructure and how lenders can mitigate mounting mortgage lossesby working proactively and with tighter controls. Finally, we highlight what European financial organizationsneed to do to stay current with landmark regulatory changes and industry initiatives that promise radicalalterations to the banking and brokerage businesses.We invite you to participate with us in an ongoing dialogue about the changes our industry faces, and thetechnological and operational impacts of these changes. Feel free to contact us We also encourage you to participate in an ongoing discussion within ourCognizanti e-community by visiting Peddada, Vice President, Banking & Financial Services Practice REFLECTIONS 4

Cognizant Community 2010Thriving inthe ‘New Normal’:A RoundtableDiscussionThe credit crisis may be forcing financial services companies to assume aback-to-basics posture, but leading players continue to apply newtechnologies to support more cost-efficient ways of doing business thatenable them to keep pace with ongoing regulatory and demographic change.The financial services industry -- locally and globally -- is at an inflection point, portending enormous change,along with measureless opportunity. The global economic crisis continues to alter the underlying marketstructure, as well as firms’ business models. Demographic trends like the riseof the mobile, socially-networked consumer and the growth of emergingmarkets are transforming where and how financial services are delivered andconsumed.While many firms are going back to basics and focusing on core deposits andasset gathering, political leaders are pressing for increased lending. Butmanaging the risk and cost of acquiring and developing the right customersremains challenging. At the same time, novel products, services and channelsare creating new potential revenue sources. Regulatory developments areexpected to force even greater change to products, services, businessprocesses and supporting technologies.Industry leaders discussed these themes and others in a roundtable discussionat the Cognizant Community 2010 Summit held in March in Scottsdale, Ariz.Led by moderator David Potterton, vice president of global research for IDCFinancial Insights, the panel consisted of a cross-section of industry leaders,spanning the banking and brokerage continuum.David Potterton, vice president ofglobal research for IDC FinancialInsights, leads a panel discussionat Cognizant Community 2010.Contending with Changing Market DynamicsOur panelists discussed the key themes for their businesses this year. The CIOof a retail bank discussed the impact of an acquisition his bank completed in5 REFLECTIONS

2008, especially the task of integrating IT systemsfor the two large institutions. “A lot of mergers failbecause of IT integration,” he said. “And wecertainly don’t want to be part of that statistic.”A director at an online brokerage company that hasgrown by acquisition in recent years told attendeesthat the buying spree is providing an opportunity totake the firm’s IT systems to the next level. He islooking at purchasing commodity IT applications (orcontinuing to use packaged IT applications) toremove the application development burden,enabling the company to focus more ondifferentiating itself from its competitors.A senior executive from a global credit cardcompany said his firm has three areas of focus this year: helping the business cut costs, keeping customerservice as high-touch as possible and growing revenue. “We are looking to be even more efficient and lean.That’s an ongoing priority,” he said. The trick, of course, is keeping costs down while maintaining the firm’shigh levels of service. “We are also trying to use the ’new norm’ -- depressing as it may be -- to our advantageso we can actually grow revenue,” he said.Ever-Evolving Partner RelationshipsPrompted by Potterton, the executives on the panel discussed how their relationships with technologyvendors have changed in the last 24 months. The senior executive at the investment management companysaid his firm continued to look to its technology vendors to partner with the business in two key areas.First, to help the company tap the arbitrage power that the globe offers today, which he felt is not as easilyattained by an institution on its own. The vendor brings to the table name recognition and hiring ability thatthe client is usually unable to match.The executive also looks to his technology vendors to provide domain expertise. “They have to understandour industry. They can’t just say, ‘I understand financial services’ and then start talking to me about chargecards. We don’t do charge cards. You need to be talking about investments, over-the-counter derivatives-- those kinds of things with very deep domain expertise,” he said.Regulatory developments are expected to forceeven greater change to products, services,business processes and supporting technologies.The retail bank CIO expects his vendors to walk in the door with a real understanding of his industry. Thebank is consolidating its vendor pool post-acquisition: The CIO and his colleagues will judge vendors, newand old, on their ability to provide a platform for innovation. The main question, he says, is: “Can you helpus think outside the box?”The online brokerage director said he is more willing now to consider smaller, boutique IT providers,although the company does not generally use “edge” vendors. The economic meltdown has pushed him tokeep options open. “All of us are being pressed to do things that probably we never thought we wouldhave to do in this particular part of our careers,” he said. “The calamity in the last couple of years haspushed us to look at other things. I think the point of looking at larger vendors and smaller vendors is thatit’s all about the solution and what you can handle in your computing environment.” REFLECTIONS 6

Four Key Themes for 2010 in theFinancial Services IndustryBy David PottertonFinancial institutions have traditionally enjoyed the role of being trusted partners andadvisors to their clientele. The last 24 months, however, have taken a toll on that positionof trust. Banks and other financial services companies are focusing on rebuilding theirposition and customer relationships.Coming out of the financial crisis, we see four major themes at work this year. Financialinstitutions are:■ Focusing on restoring their image of trust and stability.■ Searching for relationship growth with key clients, vendors and partners.■ Focusing on a client-centric model to deliver the next generation of value-addedproducts/services.■ Looking toward new markets and technologies to create sustainabledifferentiation while managing risk.Every year, IDC puts together annual predictions for the financial services industry. Hereis a sample of our worldwide predictions for 2010:1. The number of banks in existence around the world shrinks by about 4%.Last year, we predicted this percentage to be 5%, which turned out to be quiteaccurate. We have seen many of the same issues that drovefinancial services mergers last year continue in the firsthalf of 2010, and that trend will likely continue.Given last year’s merger-related issues, we predictat least two big banks in EMEA will fail in 2010due to integration disconnects.2. Information returns to users. Banks will focuson helping consumers understand their servicesand associated fees so they can make betterdecisions. In addition, banks will continue torationalize and improve the channels for how thatinformation is delivered to consumers. In North America, forexample, there is continuing branch rationalization, in many cases withinmerged institutions. However, banks are beginning to investigate seamlessconnectivity between channels, including mobile, Internet, ATM and branch.3. Focus: Risk, compliance and regulation. These topics will continue to be afocus in all areas for financial institutions, but especially around consumers.With increased regulatory burden on the horizon, especially with the recentfinancial legislation in Congress, financial institutions need to plan for theresources they will need to ensure effective reporting and compliance.7 REFLECTIONS

4. Banks redefine their business model to emphasize not just costefficiency, but also increasing profitability. In the Asia/Pacific region, forexample, new models have emerged for rural bank, micro finance and customercredit. In EMEA, they’re looking at the return of the pure domestic branch, aswell as other ways to free up budget for regulatory issues.5. Risk data: From consolidation to integration. Most financial institutionshave one or more data warehouses. But that data is not always accessible forrisk analysis. Making that data more accessible, useful and integrated withenterprise systems will be a key attribute for success.6. Capital market regulation and reporting trends. We believe that anyregulations coming out in the short term will be very specific around reporting.Less certain, however, is any new regulation coming in the future. The realscrutiny in the U.S. will be around trading activity. We expect definite actionthere, but we don’t believe it will involve an over-arching transformation of theindustry.7. Second- and third-tier capital market firms rise in importance. In EMEA,second- and third-tier firms are seeing less differentiating capability from theirtier-one competition. In North America, capital market cloud services willproliferate, with these firms seeking their niche.David Potterton is the Vice President of Global Research for IDC Financial Insights. Thisarticle was excerpted from his presentation at Cognizant Community 2010, held in Marchof this year.The Shifting Tides of Client ExpectationsMeanwhile, panelist companies’ perceptions of their clients have changed in the last two years, as well.The investment services company is looking for ways to serve its clients well -- and appropriately -- duringthe economic reset so that these customers will keep the company in their hearts and wallets.“It’s hardly shocking -- our customers are not spending as much. So with that comes the responsibility on ourside -- how do we make sure they continue to use our services when the amount of money they have to spendis significantly less than it was a couple of years ago?” the senior executive said. His company is providingnew types of content and services on a regular basis to stay relevant and engaged with clients.The online brokerage firm interacts with its clients electronically nearly 100% of the time. “Because of that,we always have to stay ahead. So we’re getting clients today that, frankly, we have not seen before -- clientswho have decided to take personal responsibility for their own financial planning. And that creates a newparadigm for us,” said the director. It is no longer enough to offer purely exchange-traded items -- the firmis building out its full suite of financial products and services to serve newly emerging needs. REFLECTIONS 8

The retail bank has seen client expectations change in recent years. Five years ago, consumers did not expectthe option of receiving their financial statements via PDA, for example. Today, if a bank does not provide thatkind of access, it is likely to be judged as sorely lacking. “It’s a shift in paradigm, and that shift is happeningreally rapidly,” said the CIO, adding that he spends a lot of time considering what’s next, as well as what thebank has to do to make sure it can serve its communities and customers the way they want to be served.Grasping the Social Media OpportunityFor decades, banks and other financial institutions had the luxury of dictating to customers how they rantheir business. But with social media, that is no longer the case. For example, the investment services firm'ssenior executive is using Twitter and Facebook for general outreach and corporate marketing purposes. Butbefore investing heavily in social media, he wants to be sure these tools will drive actual value. “We’ve gotto make sure we’re consistent with our client community. So what we’re doing more of is using some of thesocial networking tools internally, creating those personal networks to help you reach out, find the right people,find the expert and create communities for our client base,” he said.Five years ago, consumers did not expect theoption of receiving their financial statements viaPDA, for example. Today, if a bank doesnot provide that kind of access, it is likely tobe judged as sorely lacking.Younger consumers consider social media a table stake, said the online brokerage director, which meansthat the company is taking them seriously. This is important due to the upcoming wealth transfer expectedto take place in the next generation, which is earlier than with previous generations for demographicreasons. The younger generation today has little use for a telephone other than for texting. They don’tunderstand why all the companies they patronize aren’t Tweeting.The younger generation today has littleuse for a telephone other than for texting.They don’t understand why all the companiesthey patronize aren’t Tweeting.“This is a problem for all of us in financial services,” he said. “Today’s kids are going to be inheriting fromtens of thousands to millions of dollars. And they’re suddenly going to be our clients. Whereas, in the oldmodel, most of us had to earn it and then transfer it later. They’re now going to be dealing with this in their20s, 30s and 40s, and have this demand for technology.” Banking and financial services companies needto start now providing the services and content younger consumers expect.According to the senior executive at the investment services company, the challenge with social media is toseparate the hype from what really works. The company has enjoyed success with an online small business,he said, because suddenly, small-business customers are turning to each other for help on how to resolveissues. The company has discovered social media are critical in the travel space, for example. “That’s one9 REFLECTIONS

No one could have predicted how quicklyWeb-centric businesses such as Facebookand Google have accelerated. The challengefor banks and financial institutions is toleverage new technology to serve the needsof emerging customers while balancing thenew economic where social media is really, really important. Because people, as we realized, want to talk about theirtravel before they plan, when they’re planning, when they’re traveling and when they come back,” he said.No one could have predicted how quickly Web-centric businesses such as Facebook and Google haveaccelerated. The challenge for banks and financial institutions is to leverage new technology to serve theneeds of emerging customers while balancing the new economic reality. REFLECTIONS 10

■ Business Process OutsourcingWhy HolisticBPO DeliversBetter ResultsBy leveraging the synergies of a single IT and BPO services provider,and focusing on business outcomes, financial service firms canachieve process innovations that pay continuous dividends.By Ramesh RamaniThe financial services industry has become adept at achieving labor arbitrage advantages enabled byoutsourcing IT operations. Some of the larger players have also ventured into the equally cost-effective areaof outsourcing basic business processes, such as accounting, payroll or other HR processes.Now, standing safely in knee-deep calm water, many financial firms are asking, what’s next? In theaftermath of the outsourcing boom, the big-bang efficiencies seem to have all been accomplished and thelow-hanging fruit all picked. And yet the pressure continues not only to cut more costs and run the businessmore effectively, but also to break ground in new markets, reap more revenue from existing customers anddiscover innovations that increase the bottom line.The fact is, there is a next step, and it’s a transformative one – a step that can take companies from wadingin a shallow cove to sailing on the open sea. Taking this step requires a change of mindset, but those whohave taken it realize it can spur a cycle of innovation that reaps benefits far outstripping simple savings inlabor, alone.Getting there entails rising above the traditional view that puts the mechanisms of technology, businessprocesses and sourcing into three separate buckets. From this more holistic vantage point, these formerlydistinct levers intertwine in a seamless combination that best serves what should be a company’s mostimportant focus: A business solution.A business-solutions approach to BPO requires companies to ask themselves three simple questions:1. What outcomes does your business desire?2. What processes need to change to achieve that outcome?3. What do you need to measure to know you’ve achieved success?11 REFLECTIONS

Beyond a Traditional Understanding of BPOTo understand this more holistic BPO approach, let’s compare it with how we traditionally view BPO.Commonly, BPO means handing over to a service provider a basic set of processes that are not core to thefinancial institution’s business. The provider picks up where the bank leaves off, essentially performing theprocess in Chennai or Mumbai the same way the bank performed it in New York or Boston.Almost immediately, the institution realizes 35% to 40% in savings, thanks to labor arbitrage, and sitsback, satisfied with those results. However, because its processes have not been scrutinized with a freshpair of eyes, with a particular focus on optimization, the bank may actually be missing out. The benefits grindto a halt once those initial savings have been realized.Now let’s look at the same picture through the more holistic lens described above. This time, the bankpartners with a service provider that not only takes control of the in-scope processes, but it also optimizessome of the underlying technology, as well. The provider takes an end-to-end view of the function, whichcould include in-scope processes, as well as both simple and complex knowledge-intensive processes. Bylooking at both the upstream and downstream components, the provider can look for optimizationopportunities, including those that might not be apparent at first blush.The service provider is able to apply its greaterscale, best practices, cost efficiencies andtechnological capabilities to the processes,while the institution’s internal resources focuson core capabilities that further differentiateand expand its business.For instance, it might see advantages in decoupling a process that at first seems to need the client’sspecialized knowledge and attention. A closer analysis might reveal that pieces of the process are repetitiveor mundane enough that they would be better accomplished by a service provider, leaving a smaller pieceof the process under the client’s ownership. Without a holistic, end-to-end approach, this level of processoptimization could not be obtained.Furthermore, the service provider is able to apply its greater scale, best practices, cost efficiencies andtechnological capabilities to the processes, while the institution’s internal resources focus on corecapabilities that further differentiate and expand its business. The bank now has round-the-clock accessto more technology knowledge, operational expertise, scalable cost structures, and quality and performanceimprovements.Holistic BPO in ActionThis kind of partnership is happening today. We recently worked with a global alternative asset managerwith over $180 billion in assets under management to improve its process capability and reduce itsoperational costs. What started as a straightforward BPO deal morphed over a three-year period into asynergistic combination of BPO and IT, enabling the bank to improve its process capability and optimize theunderlying IT, thereby reducing costs by 50%.For this client, we manage 50 sub-processes for over 200 funds across multiple lines of business, and inless than two years, we ramped up from 30 to 300 associates. Because the partnership involved not justmanaging processes, but also outsourcing some IT functions, we were able to take advantage of synergiessuch as designing and deploying an integrated business process management tool to streamline and REFLECTIONS 12

standardize areas such as investor operations and cash management. Over a third of our professional teamat this client consists of MBAs, CPAs and CAs.The results go far beyond what could have been realized through simple labor arbitrage:■ Cost benefits in excess of 50% annually.■ Access to global talent pools to support growth.■ Cash process consolidation -- 20% reduction of FTEs.■ Automation of financial statement workpapers -- 12% reduction of FTEs.It is important to understand that to realizethe continuous innovation of a holistic BPOapproach, the provider needs to be able to equallyaddress not just BPO -- which is by definition apeople-centric business -- but also the systems andtools that support the processes and that can beleveraged across multiple projects and engagements.Here is a summary of what we accomplished for this client over a 30-month timeframe:■ Month 9: Implemented a workflow-based BPM platform for the investor operations process.> Benefits: Streamlined the investor on-boarding process, reduced turn-around time by 27%and minimized errors through controls.■ Month 12: Created an investments portal that provided workflow for testing and supporting3,000-plus underlying fund-of-funds deals, as well as centralizing the team for partner capitalfirst-level entries.> Benefits: Enhanced the control, tracking and review mechanism andmaintained the audit trail.■ Month 18: Implemented a document imaging platform that transitioned paper-intensiveactivities to a paperless environment and moved primarily onsite activities offshore.> Benefits: Reduced processing errors, increased process efficiency and drove down annualcosts by 60%.■ Month 24: Consolidated cash management across multiple lines of business and 300-plusaccounts, so that sweep interest amounts are calculated and validated daily.> Benefits: Enabled automated sweep-in journal entries, eliminating manual work; reducedFTEs by 20%; and enabled plug-and-play on-boarding of new lines of business.■ Month 30: Automated quarterly financial statement work papers by converting paper-basedoutput to Excel-based templates, with links to supporting documents and notes.> Benefits: Reduced FTEs 12% and overall quarterly work paper turn-around time by 15%;improved the audit process; reduced reporting time; and accelerated the move to real-timereporting.13 REFLECTIONS

It is important to understand that to realize the continuous innovation of a holistic BPO approach, theprovider needs to be able to equally address not just BPO -- which is by definition a people-centric business-- but also the systems and tools that support the processes and that can be leveraged across multipleprojects and engagements. This IT/BPO synergy is what fuels the cycle of innovation.This can be seen in the mortgage business optimization consultancy we did for a U.S. bank. The bank’smortgage lending division asked us to identify opportunities for process improvement, optimization,consolidation and cost reduction, with the goal of funding future growth initiatives. It asked us to developsolution options and a business case for key opportunity areas, as well as an implementation road map.We developed a synergistic strategy that uncovered approximately $18 million in savings over a three-yearbasis, spanning technology, sourcing, footprint and process optimization to continue increasing the client’smortgage lending leadership. Here is a summary of our recommendations:■ Technology: Implementation of upfront imaging to reduce printing/shipping costs by anestimated $1.25 million annually and serve as a prerequisite to leverage offshoringopportunities.■ Sourcing: Tap an estimated 100+ FTEs across regional processing centers, the wholesalelending business, the correspondent lending business, document control/post-closing andnew-loan setup. These activities have no voice-based client interactions, are relatively lowrisk, include a high degree of manual effort and are well-defined and repeatable.■ Process: Implement net funding for the retail channel and automate the construction/permanentdraw process. We also defined an incremental, high-level roadmap for the next four quarters tomitigate risk, minimize the people impact and factor in technology and consolidationdependencies.Measuring SuccessAchieving transformative ITO/BPO requires a radical rethinking of success metrics developed and used.Historically, we turn to service level agreements, such as completing a certain number of transactions in agiven timeframe or achieving a set level of uptime. But those metrics do not always accurately reflectwhether a business has achieved its goals.It’s essential, before entering into a BPOrelationship, for the client and the providerto understand how to measure success, whichentails knowing the business outcomes youwish to accomplish and devising metrics thatare in line with those events.A better way to measure success is by establishing the business outcomes that the company wants toaccomplish and then devising metrics based on those outcomes. What outcome is really going to impact thebusiness? Rather than measuring how long it took to enter data in a form or process a transaction, shouldn’twe be asking whether we’ve lowered the cost of originating a mortgage or boosted customer satisfaction?Consider a mortgage business that chooses to outsource its loan origination process with the goal oflowering the cost per loan, boosting customer satisfaction, and increasing both the quality and volume ofloans originated. If service level metrics are based on measures such as 24-hour turnaround time in 95%of the cases, how does that matter to the ultimate business goals? Are we sure that faster loan originationdrives down cost, increases loan quality, or brings in more business? It would be more important to know REFLECTIONS 14

that we lowered processing costs from $10 per loan to $8 or reduced the number of days to close a loanfrom 60 to 45.This is why it’s essential, before entering into a BPO relationship, for the client and the provider tounderstand how to measure success, which entails knowing the business outcomes you wish to accomplishand devising metrics that are in line with those events. We call this, “outcome-based BPO.”Below are some examples of metrics we created that measured the business impact delivered to our clientsin the banking and financial services industry.Process Business Impact MeasurementSubrogationEquity researchRetail banking processesIncreased addressablespaceIncreased clienteffectivenessIncreased processcapabilitiesEnabled the client to review < $ 500claims, which increased the market forthe client by approximately 16%.Provided depth to equity research whileadding capacity to research team forcore analysis. In specific instances, clientreports were singled out for enablingproprietary research content, whichmoved the market.Deployed workflow-based solutions fortransforming various retail bankingprocesses, including finance andaccounting processes.Choosing Processes to TransformThere are several considerations when choosing which processes to outsource:1. Which processes are not core to your business? If the function provides you with acompetitive advantage or is a differentiator in the marketplace, it’s not one to outsource.That means any other process that doesn’t give you a distinct advantage could be a candidate.For an investment bank trading in securities, for instance, the secret sauce is not in post-tradebook-keeping processes and reconciliations.2. Which lines of business are most commonly outsourced in your industry? This will giveyou an idea of the maturity level of the service provider offerings. In finance and accounting, forinstance, accounts payable is a critical function, but from an offshore standpoint, it’s also verymature and thus a good bet for outsourcing. With a commonly outsourced function, you can takeadvantage of what others have done; in fact, if you don’t take advantage, you will be missing outon the service provider’s ability to apply best practices to your process.3. Which areas are bogged down with inefficiencies? By ridding yourself of onecumbersome or manual function, you can free up resources to do other more important things.A good example is a large investment bank that needed to monitor the Web literally every fiveminutes in its research function. We were able to automate that function, freeing up bandwidthfor the research team to do more analysis on collected data.15 REFLECTIONS

Success FactorsTaking the plunge into a holistic BPO engagement requires a new way of thinking for many in the bankingand financial industry. It requires a willingness to make a fresh start not just in terms of processes butoften in the underlying technology infrastructure itself. Companies with significant investments in theirapplications, technology platforms and resource infrastructures are understandably reluctant to jettisonthat investment by handing over entire functions to a provider.Companies facing unprecedented growthor the need to drastically cut costs are oftenready to face down the challenges of holisticBPO in order to realize the transformativeeffect of such a bold move.But for BPO to be successful in a truly transformative way, the mindset of business-as-usual needs to beabandoned, and fast, since it cannot spur the innovations required to stay competitive in the reset economy.Companies facing unprecedented growth or the need to drastically cut costs are often ready to face down thechallenges in order to realize the transformative effect of such a bold move. For many in the financial world,it’s a matter of asking some tough questions and looking into the future: In three years’ time, will your currentway of doing business be able to support the changes -- both anticipated and unforeseen -- that are to come?Ramesh Ramani heads Cognizant’s BPO practice for the banking and financial services sector. He can bereached at Click to get more insights intoRamesh’s unique perspective on BPO. REFLECTIONS 16

UI Breakthroughs ■Transforming theUser ExperienceAcross the FinancialServices EnterpriseFinancial institutions are leveraging advances in information technology toprovide a richer computing environment for their employees, laying thegroundwork for improvements in productivity, accuracy and customersatisfaction. Here’s a glimpse of what the future will bring.By Siva Visveswaran and Makarand PandeFew aspects of software development have undergone a more thorough transformation than the way usersinteract with applications. In the financial services industry, as elsewhere, user interfaces (UIs) have changedso much, so quickly, that it is difficult to recall that, not long ago, they were anything but graphical or usable.The earliest banking applications that ran on mainframe computers featured UIs based on standaloneterminals (a.k.a. green screens) with cumbersome data entry, unintuitive navigation and deep hierarchicalmenu structures. They were, however, fast, reliable, and suited for very specific tasks. While the client/serverera brought a graphical user interface to enterprise applications, the vast majority of banking applicationsstill ran on mainframes, with Windows-based GUIs.The Internet era made GUI applications available via a browser, and more and more banking applicationswere Internet-enabled. The pace of change, however, has rapidly accelerated over the last few years withWeb 2.0 and rich Internet standards such as HTML 5. The demarcation between desktop, intranet and Internetapplications is slowly dissolving, and mobile and smart phones are beginning to replace desktops. The stageis set for highly advanced UIs.Meanwhile, user interfaces have evolved simultaneously in four dimensions (see Figure 1, next page):■ UI technology■ User experience■ Information architecture■ Content17 REFLECTIONS

UI Evolution1 st Generation 2 nd Generation 3 rd Generation 4 th Generation 5 th GenerationContentevolutionApplication dataForm data,static contentStatic and dynamicunstructured dataEnterprise datamashupsPublic and privatedata mashups.......InformationArchitectureEvolutionFixed hierarchicalmenusForm-basedmenusTab-basedstructuresRich navigationtaxonomiesSocial computing/Folksonomy.......ExperienceevolutionData entryprogrammable keysPoint andclick GUIBrowser indesktop (portal)Desktop inbrowser (RIA)Touchscreen,multimodal.......TechnologyevolutionMainframeterminal emulationClient/serverBrowser-basedthin clientsBrowser-basedrich clientsTablet interfaces.......1970 1980 1990 2000 2010 2020Figure 1As we can see, a convergence is taking place between desktops and handhelds, unstructured and structuredcontent, controlled navigation taxonomy and user-defined tagging (i.e., “folksonomy”) and task-centric androle-centric UIs.The State of Financial Services DesktopsFinancial institutions -- from regional banks, to global wealth management firms -- are focusing on theeffectiveness and efficiency of their employees across the front, middle and back office to reduce operationalcosts or grow revenues by attracting and retaining customers.For example, a trader’s decision to take a specific market position for his desk or for a customer is based ona set of variable data, including market volatility, spread and information on related instruments (such asoptions and real-time news). Today, the trader has to access several different applications or locations toobtain relevant data using manual context/search, which consumes valuable time and effort (see Figure 2,next page). This manual approach risks data accuracy and integrity, while requiring an inordinate amount oftime and mental effort to analyze and correlate information and arrive at a decision. The situation becomesmore complex if the trader is working on behalf of customers, as he needs to understand their portfolios andindividual strategies to create a properly aligned order.In the financial services industry, as elsewhere,user interfaces have changed so much, so quickly,that it is difficult to recall that, not long ago, theywere anything but graphical or usable.The current trader workstation arose from multiple siloed systems, developed using heterogeneoustechnologies over time, to meet incremental operational needs. Until a few years ago, there was no easy wayto integrate content without re-architecting source systems. However, with today’s advances in softwaredevelopment in general, and UI technologies in particular, the trader’s work life can be made much moreefficient, effective and pleasant.In a retail bank, relationship managers (RMs) who serve as client financial advisors typically have access todedicated tools and information to use in their interactions with clients. While current interfaces provide aflood of data and tools, the data is not available in real time. Therefore, customer insights are often not REFLECTIONS 18

Trading System Process Flow■ Research and analysissystem provides analysis onselected instrument■ Standalone system■ Reuters, Bloomberg andother market data sources■ Standalone system■ Portfolio and accountinformationTrader keys in search phrase and other context information■ Trader decides to take positionand create orders■ Trader uses the following information fromvarious discrete systems to decide position:> Real-time market data> Research and analytics> Market news> Investment strategyFigure 2timely, and the RM still needs to navigate multiple bank applications to analyze and understand customerneeds and arrive at recommendations.As banking business models move from transaction-oriented to relationship-oriented, thedesktops/workstations that RMs use need to enable them to be more effective consultants in their clientadvisory roles (see Figure 3).The Internet has also become more strategic, as more and more business transactions are completed on theWeb, and financial institutions are deepening their customer relationships via this channel. Financial institutionsare integrating branch sales, call-center servicing, and back-office support, providing rich services online. CurrentWeb applications mostly serve as a convenience to check balances or to push weakly targeted brochure-ware.More complex transactions can be started, but they cannot be completed via this channel alone.The Next Generation of Financial Services DesktopsWith the advent of new UI technologies and development techniques, the future of financial servicesdesktops is intriguing. Advances will come in four major areas:■ Richer interfaces■ Aggregation of multiple internal and external data sources in real-time■ Superior search/decisioning capabilities■ Better currency of the data on the screenFinancial services personnel will be better equipped to react to changing market conditions and customerneeds using these new interaction platforms.Revisiting the example of the trader workstation, as shown above, the trader will be able to enter one or moreorders into the system. On the same screen, he will be able to search on the user’s account to find pendingorders. Before deciding to make a particular trade, the trader can view the current market contract price (inthe case of a futures contract), and in the same place, he will be able to view relevant external data, as wellas general economic indicators (from Thomson Reuters, Bloomberg and the like). Based on all these datasources, the trader can decide what sort of bid to put in the market and how to go about securing it.19 REFLECTIONS

Relationship Manager Desktop: Current State■ Customer visits branch tomake a deposit■ Teller system notifiesrelationship manager (RM)■ Customer had recently contactedthe call center regarding an issueand wants to discuss with RM■ RM tries to get all informationbefore meeting with customer■ RM will attempt to understandcustomer needs■ RM accesses multiple systems anddatabases to get customer details:> Customer contact> Household information> Financial information> Account information> Relationships> Customer interactions> EmailCRM Systems(Call center, marketing applications)Desktop applications(Notes, calendar, email)Legacy systems(Deposit systems, accounting systems)■ RM cannot see the contacthistory and notes fromCRM system■ RM does not have enoughinsights to suggest productsDatabase/Analytic data storesFigure 3In the future, the trader desktop will automatically populate the three different data sets for optimal decisionmaking. There will be a simple widget; the moment the trader enters the futures contract user ID, for example,he will see all the pending orders, market spread, prices and general data feeds -- a mashup of public andprivate data. Though not instantaneous, the data will come much closer to being real-time. This will improvethe quality of orders and decision-making ability, resulting in a 10% to 20% reduction in order times.By contrast, the relationship manager needs a full range of data to advise clients on their next moves. Theadvisor does not need to look at trading and research data, but does need to see customer orders and currentpositions. The future RM workstation will show the state of the orders, along with business intelligencetools, allowing RMs to better manage customer portfolios (see Figure 4).Advances will come in four major areas:richer interfaces, aggregation of multiple internaland external data sources in real-time, superiorsearch/decisioning capabilities and bettercurrency of the data on the screen.To manage a particular account, the RM can do some analysis on the portfolio allocation on the lower partof the screen. Today, the RM workstation might have a different client/server application interfacing withother systems to access data. By contrast, in the future, the integration will be based on rich Internettechnology, obviating the need for the user to manually access different systems. The integration will appeartransparent to the user.Future Internet and mobile channels will provide enhanced planning, decisioning and transactionalcapabilities for customers. Leading online brokerage houses such as E*Trade (e.g., the Cash Optimizer tool)and Charles Schwab already provide sophisticated tools for portfolio planning and trading. Aggregators such REFLECTIONS 20

EDZO 00.73 00.68 00.72 00.72 0.02 0.43 00.72 112128.00 86287Trading Workstation: Future StateTrading WorkstationMy Home l Trade Management l E vent Management l Administration l Repo r tsYou are here: HomeMy WorklistDesktop in abrowserMy Profile l LogoutWelcome John !! (Trade Support) CustomizeAssigned : 65 Pending : 12- Searc h / R etrieve Trade Job ExceptionTrade IdMy Client TradesTrade CategoryMy Client TradesAccountAccountMy Client TradesTrade IdMy Client Trades Trade Category My Client TradesAccount My Client Trades Account My Client Trades>> Go ClearAdvanced SearchExchange Account Product B/S State Cityanding Exec-Price Price Type Split Status #PricesGLOBEX PAE50 ES 1006 BUY WOR... Enterprise 551,101.6 1,101.75 LMT 2GLOBEX PAE50 ES 1006 BUY mashup551,101.751,101.75 LMT 1GLOBEX PAE50 ES 1006 BUY FILLED01,101.751,101.75 LMT1GLOBEX PAE50 ES 1006 BUY FILLED01,101.75 1,101.75 LMT1GLOBEX PAE50 ES 1006 BUY FILLED 1 101,101.75 1,101.75 LMT1Euro Dollar FuturesPrices Change: 5 DaysSelect Product to Viewƒ~ABC D E F G H I J1RIC Buy RIC Buy RIC BuyRIC B1,003.25 258.00RIC PX PX win PX wix PX Cix VitaminsPX Cig stdy bpz Px AugVnl A21,003.00 551.000.43 00.720 112128.003221,006.75 34.00EDHO 99.00 99.47 99.00 99.04 .05 00 1590245 EDMO 99.49 99.10 99.40 99.40 0.07 00 201121,000.50 4,355.10Role Based6HHH 99.1990.70 99.15 99.15 0.72 00 197911,006.25 223.0030interaction98.33 98.78 98.78 1.12 00 230231,110.10 411.08111987.87 88.17 88.19 1.61 00 168144.03 1.007.757Business eventtaxonomy8887.82 98.98 98.98 1.87 00 1155281.11 1,105.517397.30 97.75 97.75 8.10 00 22.7750.00notifications100.2534297.01 97.46 97.46 2.50 00 47.01,551.11 1,111.11188.1 071397.78 97.21 97.21 2.75 53468.003834.770.00907.99 90.0990.55 90.97 90.91 2.99 40090.0050005999.75Sheet1 Sheet2 Sheet3???? High Medium Low100%Event Processing SummaryAlerts New Alert ArchivedException SummaryQuick Links & ContactsFigure 4as and provide rich personal financial planning tools. Importantly, market surveysindicate that customers are switching to financial institutions with strong online/mobile capabilities.Enabling the Interaction Platforms of the FutureThe following next-generation software development technologies and processes will enable these futureinteraction platforms:■ Process-centric designs. The user interface has been shifting slowly toward becoming muchmore role-based and process-centric. Users are provided information and decisioning tools based ontheir role within the organization. For example, a relationship manager needs to see 360-degreeinformation about the client -- that client’s position, portfolio, all relationships with the institutionand insights about the client’s preferences, product recommendations and risk profile. The RM alsoneeds to see how the market is performing and which products would be the best for this user,based on analytical models. The RM’s screen is tailored to his unique duties, as are others’.■ Emerging information architecture paradigms based on Web 2.0/Google-like interactionsand social media constructs such as Facebook. Structured data from relational data storescombined with unstructured documents and user-generated multimedia content can provideinsights about consumer sentiments. Semantic Web interfaces can make search and navigationmore effective, improving real-time decisioning. The future will be much more collaborative andintuitive, and user interfaces will be designed accordingly.■ “Service-ification” and componentization of applications and desktop functions. Thefuture of application development lies in the ability to create “services” (such as “check credit” or“validate order”) that can be delivered to a variety of different applications via a service-orientedarchitecture (SOA). These developments will fuel the transformation of the UI. Traditionally,applications were built end-to-end. Now and in the future, everything will be componentized. Awidget will display the customer’s last position and last 10 transactions, for example. Every pieceof functionality is being wrapped into a UI widget. Presentation will be embedded with theinformation.21 REFLECTIONS

■ Modern technologies, such as Adobe Mosaic, Java FX and Microsoft Silverlight. Thesetechnologies already support these new paradigms, combining frameworks, developer tools andrun-time environments to make designing, developing and deploying rich and easy.■ Business-IT SDLC (software development lifecycle). With the technological advancesmentioned in the previous bullets, it is now possible for business users to design and develop theirown applications. The business person chooses from a series of widgets and assembles theapplications he needs for the situation at hand. (“Situational” or “mashup” applications are anothername for this.) The software development lifecycle is shifting to allow business users to take thedriver’s seat. In this new paradigm, business process analysis is tightly integrated with UI design.UIDLC will enable a process-centricapproach to defining user requirements andintegrate user experience considerationsthroughout the development lifecycle.The Road to User EmpowermentGiven the decades-old legacy environments that need to be dealt with, transforming the UI is not going to beeasy for many institutions. Some short-term wins may be gained by deploying portal technologies that canprovide easier access to the legacy applications. However, to truly transform the user experience, financialinstitutions need to follow a top-down user experience transformation approach (see Figure 5).The key points in this approach are:1. Clearly defined user experience metrics across branding, usability, content and functionality.2. Incorporation of next-generation (fourth or fifth) elements in the UI design, especially aroundinformation architecture and content.3. Selection of a technology stack that meets enterprise architecture guidelines. The prototypeshould be used to benchmark target state metrics.User Experience Transformation MethodologyBuildEnvisionDesignPrototypePlanDeployEnvisionDesignPrototypeTransformMonitor■ Imagine newinteraction platform■ Define targetuser experiencemetrics■ Fourth or 5thgeneration userinterface■ Process-centric androle-based■ Select technologystack■ Benchmark prototype■ Transform by businessprocess clusterFigure 5 REFLECTIONS 22

4. Use of a business-driven, iterative approach to transform existing applications. With eachiteration, reusable assets are created.5. Establishment of a user interaction development lifecycle (UIDLC) discipline within the overallsoftware engineering process. UIDLC will enable a process-centric approach to defining userrequirements and integrate user experience considerations throughout the development lifecycle.It is also important to note that user experience transformation enables IT transformation. By creatingcommon UI widgets that combine both form and functionality, IT portfolios can be simplified into common,reusable components that can be mashed up and leveraged across the enterprise. UI transformation alsoenables and/or leverages data harmonization/rationalization initiatives to leverage customer and marketinsights across business units that deliver better sales and service.The evolution of user interfaces is one of the most exciting areas in financial services software development.Technologies and techniques are changing very rapidly, enabling financial companies to empower theiremployees with role-specific interfaces. No matter which type of employee, providing fresh data in oneplace with seamless search capabilities will go far toward increasing productivity, enabling better returnsto the business.Siva Visveswaran is Global Head of the Technology Consulting Group within Cognizant’s Banking andFinancial Services Practice. He has over 22 years of IT strategy consulting, enterprise architecture andsolution delivery experience, and has led numerous IT modernization/transformation consultingengagements for major North American banking and financial services firms. He can be reached atSiva/Visveswaran@cognizantcom.Makarand Pande is Chief Architect within Cognizant’s Banking and Financial Services Practice. He has over18 years of experience in IT strategy consulting, solutions delivery, enterprise and application architecturedefinition and defining assets and frameworks to facilitate enterprise transformation initiatives for largecomplex organizations. Makarand can be reached at REFLECTIONS

■ Securities TradingWhy UnifiedRisk Managementis a Must in theReset EconomyThe global economic meltdown revealed how little the financial industryknows about the combined risks of trading and lending. A more unifiedapproach to risk management can help can help prevent worst-case outcomesand place appropriate limits on risky activities.By Sudhir Gupta and Anshuman ChoudharyThe unification of market and credit risk measurement has long been discussed in academic and regulatorycircles, but banks have been slow to act due to procedural challenges and uncertainty about the benefits.When the global economic crisis hit, it further revealed how little banks and other financial institutions trulyunderstand the combined risks of their trading and lending activities. Stakeholders -- ranging fromshareholders to regulators and the public -- are demanding that banks now take a unified view of these risksto protect not only the financial institutions, but also the entire global economy.While totally unified risk management may still be unfeasible, beginning the unification effort with tradingactivities can deliver short-term benefits while paving the way to future, wider unification.This article focuses on securities trading, but the suggestions to a large extent are applicable to other lines ofthe business, as well as organizations such as energy producers that trade in non-financial products or services.There are two primary risk measures:■ Market risk measures: The likelihood that a “normal” movement in risk factors, such as achange in the price of a security or in interest rates, will cause a loss.■ Credit (or counterparty) risk measures: The likelihood that a rare event, such as the defaultof a trading partner or a large borrower, will cause such a loss. REFLECTIONS 24

Managing risk involves understanding the likelihood and impact of the worst-case outcomes and placingappropriate limits on risky activities.With the advent of practices such as securitization and products such as credit derivatives, banks are exposedto combined risks. This is especially true for banks with large over-the-counter derivatives positions, whichinvolve significant counterparty and market risk within the same position. Achieving unified risk managementinvolves effort and investment, but it facilitates regulatory compliance and delivers meaningful risk measuresthat help senior management make better decisions.While totally unified risk management may still beunfeasible, beginning the unification effort withtrading activities can deliver short-term benefitswhile paving the way to future, wider unification.Such unification requires realigning business functions and integrating applications and infrastructure. Thiscan be achieved by moving incrementally and reusing “intellectual property” such as data definitions,business rules and risk calculators wherever possible. Some of the best practices for each step aredocumented below.Realigning Business FunctionsTo get started, organizations must realign their business functions. This means creating the reporting andfunding structures to assure proper accountability, incentives and information flow for unified risk management.These functions include the business departments that conduct transactions (i.e., the front office) and those thatcontrol the exposures taken by the front office (e.g., risk management, finance and compliance).Current Organization Structure forRisk Management of Trading ActivitiesHead FrontOffice & TradingDesk HeadEquitiesRisk Head Trading& Capital MarketsManagerMarket RiskTrader EquitiesMarket RiskOfficer EquitiesDesk Head FXMarket RiskOfficer FXTrader FXMarket Risk OfficerFixed IncomeDesk HeadFixed IncomeManager TradingCredit RiskFront Office TeamTrader FixedIncomeCredit RiskOfficer EquitiesCredit RiskOfficer FXCredit Risk OfficerFixed IncomeTrading Risk Management TeamFigure 125 REFLECTIONS

Currently, “front offices” are organized by transaction type (e.g., stock, bond, foreign exchange, etc.) andreport to a business owner who measures them on their profit or loss. The groups within an investment bankthat assess risk and set limits on trades are also organized by transaction type, as well as by the type of riskthey assess. Their assessments of market and credit risk are only pooled when they are reported to seniorlevelanalysts, who in turn report to the chief risk officer.We recommend an organizational restructuring that provides an integrated view of risk at the transactionlevel. On the business side, this includes the groups that define the criteria, or requirements, on which riskwill be assessed. Combined groups can develop standard data definitions that enable consistent aggregationof risk measures, such as potential future exposure for credit risk and risk factor sensitivities for market riskacross business units. Such aggregation further helps the business understand the complex interactionsbetween market and credit risk.Data integration is also required because trades ofdifferent types of asset classes or products may beexecuted on different applications, have differentattributes and generate data in different formats.IT functions that support the risk assessment of business units should also be integrated. Currently, frontoffices pay for “siloed” IT functions based on the type of transaction they support. We suggest that the frontoffice should allocate the budget for overall risk management activities (with oversight from seniormanagement) and that this budget be used by both the risk management and the supporting IT teams todemonstrate the value they have provided to both the front office and the overall organization.Support from C-level executives is indispensable in overcoming the inevitable resistance to change andfears that sharing data will lead to loss of power, prestige, or funding.Integrated Applications and InfrastructureThe next step is to create the applications and supporting infrastructure to support unified risk analysis.Areas to consider are:1. The data and associated databases2. The aggregation tools that combine data for analysis3. The calculators that determine the risk4. The reporting tools that communicate the results to business managers.Data integration is also required because trades of different types of asset classes or products may beexecuted on different applications, have different attributes and generate data in different formats. Inaddition, the information required to assess all the risks for one trade might come from many sources, rangingfrom market data, to macro-economic data, such as securities prices, corporate actions and interest rates.Assessing counter-party risk, in addition to this data, requires monitoring events such as rating downgradesand aggregating all the trades with a specific counter-party, regardless of the trading desk involved.Combining this data requires a fairly sophisticated data aggregation layer. This consists of ETL (extract,translate and load) tools, the rules that define how data fields are mapped among data sets and visualizationtools that illustrate the source of each type of data and how it was mapped to other data stores. Werecommend a single data aggregation layer, flexible enough to accommodate new risk criteria that emergebetween the definition of the requirements and the implementation of the system (such as data granularityrequirements for asset-backed securities). REFLECTIONS 26

543210Solution ArchitectureData Source Data Integration Data Warehouse DataMartsTheme 1: Trade DataTradesETL Feed HandlerTradesFX Trades Fixed IncomeEquitiesData EnrichmentFile 1 File 2 File 3 File 3Theme 2: ReferenceClients & OthersSec. MasterReference DataClientCurvesRatings Corp. Act.AgreementsData QualityDashboardRejectNotificationData Load MonitorQuality RuleApplicationRejectRecordsETL FeedHandlerStagingETLRejectRecordsReferenceSummaryOther SubjectAreasSimulationEngineCalculationsResults DataETLRiskALMSemanticLayerStandardOLAPBusinessObjectsUniverseAd-HoHocInformationDeliveryStandardsReportsOLAP/AdhocTheme 3: Other SourcesTime SeriesGLReconcilliationTheme 4: Other Exotic ProductsCDO Commodities LoansETL FeedHandlerData Load MonitorQuality RuleApplicationData QualityDashboardRejectNotificationRAROCSales CreditDashboardDataPrivacyMetadata LayerAuthorization/AuthenticationFigure 2The flexibility to aggregate data in new ways also aids integrated risk analysis, such as the use of datamarts to aggregate the same risk data in different ways to measure various risks.The third element involves risk calculators, massive applications that create 10,000 scenarios or more forevery transaction, with the worst outcomes used to rate risk. Historically, these have been siloed by marketand credit risk because they use different criteria and scenarios; many financial companies have also lackedthe computing power to run both analyses at the same time.The third element involves risk calculators,massive applications that create 10,000 scenariosor more for every transaction, with the worstoutcomes used to rate risk.To do this right, banks should evaluate an emerging class of combined analytic tools, often supported bygrid-computing platforms, to provide the requisite horsepower. We also recommend implementing thesesolutions initially on products with lower trading volumes. This will allow the organization to first gainconfidence and then prepare for wider use. These combined calculators can also run “one-off” unified riskanalyses (such as stress tests or scenario analyses) and report the results to senior management as “proofpoints” for wider use.The final infrastructure element is reporting tools, which in the past have been siloed between market andcredit risk. This has traditionally meant additional licensing and training costs, and the risk of inconsistent27 REFLECTIONS

and incomplete risk reporting. We recommend a single reporting layer, flexible enough to accommodate newtypes of data and analysis as new risks emerge. Our experience suggests modifying security rules to allowanalysts to append not only commentary, but also the actual results of their ad hoc analysis into reports somanagers hear the “lonely voices” that might warn of a dangerous trend.Take an Incremental Approach“Big bang” unification projects are risky because of the time, cost and complexity of changing manyinterlinked technologies and processes at once. In addition, the larger the project, the higher the expectations,and the greater the pushback if anticipated changes don’t yield the expected payback quickly enough.But such ambitious projects are required if the current processes are too ineffective to be fixed. The big bangapproach can also be adopted in situations where the processes are very well-defined and the businessunderstands its processes so well that it can give IT a stable set of requirements, along with theimplementation roadmap.In most cases, though, we suggest startingsmall to demonstrate success (defined asaccurate risk assessment and demonstrableresults) with the least risk.In most cases, though, we suggest starting small to demonstrate success (defined as accurate riskassessment and demonstrable results) with the least risk. This also reduces the chances that changes willinterfere with each other in unexpected, harmful ways.Making use of existing knowledge, applications and data reduces the time and cost of unified riskassessment. This “intellectual property” includes the business rules for dictating acceptable levels of risk,the requirements for assessing risk and the rules that govern data mapping. A service-oriented architecturecan make such re-use easier, especially for data aggregation, calculators and reporting.Organizations should consider partnering with specialists for functions such as maintenance, dataaggregation and the running of reports. This can free experienced staff to address the challenges of unifiedrisk management.Finally, consider allowing customers to use part of the risk-assessment infrastructure to weigh their own risksin purchasing a complex financial product. This is not only less expensive than building and selling customcalculators, but it also increases customers’ trust in the bank and its offerings.For their own good, and for that of the global economy, banks must adapt their technologies and processesto correctly assess both the market and credit risk they face. Focusing on realigning business functions,integrating applications and infrastructure, proceeding incrementally and reusing intellectual property canhelp to smooth the way.Sudhir Gupta is Assistant Vice President, Consulting, and heads Cognizant’s Investment Banking Practice.He has 25 years experience architecting and developing large, complex solutions in the areas of investmentbanking, risk management and securities services. He can be reached at Sudhir. Choudhary is a Cognizant Senior Consulting Manager who specializes in risk management andcompliance and has deep experience in OTC derivatives and stock exchanges. He can be reached REFLECTIONS 28

■ Lending ServicesMortgage-LossMitigation: AProactive ApproachNew measures are needed to contain loan defaults due to falloutfrom the Great Recession of 2008/2009. Servicers need a comprehensiveapproach, driven by better intelligence, better campaign managementand quality control to contain loan losses.By Ashish Shreni and Nate LongfellowThe mortgage servicing industry is struggling with what is hopefully a once-in-a-lifetime crisis. Extremeeconomic conditions have led to an explosion in loan defaults. Overall, the U.S. has over 55 million firstmortgageloans managed by over 100 servicers. According to National Mortgage News, approximately 8%of these will default over the next 12 to 18 months -- much higher than the historic level of roughly 1%.While current delinquency levels are between 3% and 7%, depending on the quality of the servicer’sportfolio, this number is expected to rise, possibly reaching as high as 10%. The enormity of the situationcan be illustrated by a simple fact: As depicted in Figure 1, for the top five servicers, a 1% increase in thedefault rate means an additional 400,000 defaults.Key Stats for Top ServicersServicerPortfolios($ billion)Loan Volume(million)*Delinquent LoanVolume**Bank of America 2,112 12.80 1.02Wells/Wachovia 1,767 10.71 0.86JPMC/WaMu/EMC 1,477 8.95 0.72Citi 791 4.79 0.38ResCap/GMAC 390 2.39 0.19Total 6,537 39.64 3.17Source: *Average loan of $165,000 **Delinquency percentage 8%Figure 129 REFLECTIONS

Servicer PortfoliosTo stem the tide of foreclosures and mortgage defaults, the U.S. government developed the Making HomeAffordable (MHA) program, also known as the Home Affordable Modification Program (HAMP).MHA/HAMP’s aim is to allow borrowers to retain their homes by reducing their monthly payments toaffordable levels, while offering servicers and investors incentives to make these modifications.Unfortunately, many servicers have experienced challenges in developing an optimal MHA campaign andexecution strategy. These challenges were caused by a variety of factors, including frequent updates andchanges to the program by the government, adjustments to systems and processes to accommodateprogram requirements/changes, and simply dealing with the sheer magnitude of borrowers who werepotentially eligible for the program.These factors helped reduce the initial effectiveness of the program, as pointed out in a recent MHAServicer Performance Report provided by the U.S. government. The report revealed:■ The number of distressed borrowers initially expected to be able to reduce their mortgage paymentswas estimated at 3 million to 4 million. Through May of this year, only 1 in 10 borrowers whoentered the MHA program, or roughly 350,000, have had their loans modified permanently.■ The largest servicers have the lowest rates of loan modification success (see Figure 2), as wellas the longest periods of distressed loans languishing in program trial periods of over 90 days(see Figure 3 on the following page).■ Servicers are struggling to move borrowers through MHA/HAMP trials in a timely fashion,ultimately resulting in higher default levels. By and large, they have not been able to optimizethe loan mod process (such as the initial MHA application, gathering the necessary documentsand securing loan underwriting).While the program has experienced initial challenges, servicers are just now starting to establish bettercontrols, which should help increase the overall final loan modification pull-through.Conversion Rate8071%69%64%60190,000 active trials wereinitiated at least six months ago.4054% 51% 51%39% 37%33% 33% 32% 31% 30%28%23%2020% 17%12% 12% 10%0JP Morgan ChaseSaxonU.S. BankOther GSE ServicersCitiMortgagePNC MortgageAmerican HomeAuroraOneWestGreen TreeOther SPA ServicersGMACWells FargoBank of AmericaNationstarCarringtonLittonSPSHomEqOcwenSource: The Making Home Affordable Program Servicer Performance Report 2010 2 REFLECTIONS 30

1008060Aged Trialsas Share of Active TrialsTrial Evaluation:86% 83%79% Verified Income63% Stated Income59% 56% 56% 55%47% 44% 40%34% 32% 32% 31% 29% 26% 25% 25% 24%402011%0Trial Length at 3.2 3.0 4.6 3.3 3.1 3.8 3.0 3.6 3.5 3.7 5.3 3.6 4.4 3.9 6.3 3.4 4.9 7.4 4.0 5.3 3.3Conversion(months):HomEqOcwenCarringtonGMACAmerican HomeU.S. BankOther SPA ServicersOther GSE ServicersWachovia FSBSource: The Making Home Affordable Program Servicer Performance Report 2010 3Key Challenges and Fundamental Capabilities Required forProactive Loss MitigationSPSNationstarMortgage servicing has undergone unprecedented change in recent years. Since the Great Recession of2008/2009, servicers have been hit with a triple whammy -- an explosion in defaults, overly complex lossmitigation strategies and antiquated systems with non-standard processes to manage them. Further, thechallenges that servicers tried to address while developing an effective MHA program have forced themto focus a majority of their technology, portfolio analysis and operational efforts on the MHA program. Dueto these multiple challenges, servicers have understandably become more reactive to default managementrather than focusing on proactive default management techniques.Developing a more proactive default management strategy is clearly easier said than done. A variety ofcapabilities must be present within the servicing organization. Below are a few key fundamental capabilitiesthat help enable a more proactive default management approach:■ Have clear visibility into asset performance characteristics. Loan servicers need tobecome better at predicting which loans have a higher likelihood of default. They need betterprocesses, systems and data warehousing capabilities to achieve this.■ Maintain a campaign management focus. Campaigns help reach the borrower with the rightoffer at the right time; thus, servicers need to dedicate resources, time and effort into the ongoinganalysis, design and implementation of loss mitigation campaigns.■ Utilize workflow and decisioning tools. Most servicing systems lack meaningful workflowand decision support tools needed to address the large volume of defaults in a structuredfashion. To enable greater process throughput, control and consistency, automated decisioningand workflow tools are needed to provide expanded organizational bandwidth, which, in turn,will help drive more proactive default management.■ Maintain meaningful operational controls. To more effectively mitigate losses, servicersneed to have appropriate and adequate measurement and control mechanisms to catchdeviations and exceptions to campaigns and programs in time.Green TreeAuroraOneWestSaxonLittonWells FargoJP Morgan ChaseCitiMortgageBank of AmericaPNC Mortgage31 REFLECTIONS

Servicers need a comprehensive approach toloss mitigation that proactively identifies loandefault, covers all loss mitigation programs(see Figure 4), identifies the right strategy forthe borrower and tracks performance of thatstrategy at the loan level. The next sectionbriefly discusses key loss mitigation programsto help elucidate the solution approach.Loss MitigationPrograms/StrategiesLoss mitigation programs can be broadlyclassified as customer-based resolutions orcollateral-based resolutions.■ Customer-based resolutions: Inthese programs, the borrowerretains the property, and theservicer tries to work around the borrower’s financial situation by modifying the paymentstemporarily (modification) or permanently (forbearance/deferment).■ Collateral-based resolutions: In these programs, the borrower does not retain the property.These solutions revolve around the sale or transfer of the property, where the lender obtains areduced payoff amount (short sale) or simply agrees to take the property without completingforeclosure proceedings (deed-in-lieu).Customer-based resolutions are often better for the investor, the servicer and the borrower, as the borrowerretains the property and the loan begins to perform again. But each of these options has many nuances, andthey follow a waterfall-like flow. At each stage, servicers need to determine answers to critical questions,such as, “Which loans are good candidates for MHA/HAMP or standard modification? Which loans shouldwe pursue for short sale or deed-in-lieu? Which loans should be pursued for classic foreclosure?” Thesolution approach should provide timely and accurate answers to these questions to help proactivelymanage loan losses.A Proactive ApproachLoss Mitigation Strategies/ProgramsFigure 4Customer-Based Resolution■ Mods – HAMP/BAU/Investor Mods■ Repay Plans■ Forbearance■ DefermentCollateral-Based Resolution■ Short Payoff■ Short Sale■ Deed-In-Lieu■ FC, REO■ Note SaleA comprehensive approach based on timely and accurate portfolio intelligence, strong campaignmanagement and quality controls is required to proactively reduce loan losses.■ Portfolio intelligence at the loan level: To manage the explosion in the variation and scale ofdefaults, more diverse views of loan performance above and beyond simple default rates and rollrates are required. Developing a robust reporting database with multidimensional views of assetcharacteristics and performance is absolutely essential. This intelligence should be available atthe loan level and should cover the life of the loan across various loss mitigation programs.■ Strong campaign management: Successful servicers dedicate time and effort into theongoing analysis, design and implementation of loss mitigation campaigns. This focus cannotalways be left to loss mitigation front-line management to coordinate independently. The linemanagement staff is typically inundated with “business as usual” activities that can easilydistract from daily campaign analysis and management. To drive greater success, dedicatedresources should be leveraged for this function alone. The focus is far too critical to leave as asecondary or tertiary priority for line management.■ Quality controls: To more effectively mitigate losses, servicers must apply checks and balances toHighRe-performancepossibilityLow REFLECTIONS 32

Loss Mitigation Program TrackingThe global credit crisis has made it difficult for loan servicers to keep pace with their expandingportfolio of mortgage delinquencies. To remain proactive and mitigate losses, servicers requiremechanisms to track the following loss mitigation programs:■ Repayment plan. This is the simplest form of loss mitigation, in that the borrowersimply repays the outstanding delinquency over a short period of time (typically threeto six months). This plan is typically applicable to borrowers who experienced a shorttermhardship but now maintain the capability of making their scheduled payments,in addition to paying for past-due amounts in a short period of time.■ Permanent loan modification (known as “mod”). A form of borrower-basedresolution, this is where the servicer is able to reduce the borrower’s payment on apermanent basis by altering the terms of the loan (reducing interest rate, extendingterm, deferment of principle, etc.).■ Deferment/Forbearance (“forbs”). This is typically utilized for temporaryhardships, where the borrower has the ability to cure the delinquency at a near futuredate (pending the reemployment of a co-borrower after a lost job, etc.). In this case,the borrower is provided a temporary reprieve of foreclosure proceedings, whileagreed-upon payments are made for a temporary period. The payment plan typicallydoes not resolve the delinquency but provides additional time for the borrower toresolve his hardship prior to establishing a permanent resolution plan (repaymentplan, modification, etc.).■ Short sale. Generally used in cases where the borrower cannot maintain themortgage payment and is “underwater” (i.e., owes more on the mortgage than theproperty is worth), the short sale allows the borrower to walk away from the propertyin exchange for the net amount generated from the sale of the property. In many nongovernment-sponsoredshort sales, the servicer may hold the borrower responsiblefor the difference in the agreed payoff amount and the total indebtedness (commonlyreferred to as deficiency). Successful servicers develop a campaign strategy to solicitshort-sale opportunities rather than simply waiting for the borrower to deliver anoffer. More advanced servicers provide support during the process to provide listingprice feedback, listing monitoring and access to resources that will assist borrowersin selling the property.■ Short payoff. This is similar to a short sale, in that the borrower is allowed to pay offthe loan for a reduced, agreed-upon amount with another lender. This is sometimesreferred to as a short-refi. This option is typically viewed as less desirable from theservicer’s perspective, as it allows the borrower to retain the property while the lendersimply takes the loss. While this mitigation plan can be tough to swallow from aservicer’s perspective, it may be an appropriate course of action for many loans. Thesetypes of resolutions are also infrequent, as they require a third-party lender to believethat the risk of a currently delinquent borrower is acceptable to extend a new loan.■ Deed in lieu (DIL). Another collateral-based resolution, DIL provides the borrowerwith the option to deed the property over to the lender and walk away from the loan.Essentially, the DIL is an accelerated foreclosure from the lender’s perspective. Itenables the lender to obtain an imminent foreclosed property sooner and likely inbetter condition than a traditional foreclosure. This approach reduces the carryingcosts of the asset as it assists in expediting the inevitable REO sales process.33 REFLECTIONS

The Cycle of ReformMarketDynamicsUpfront ControlImplementationImplementQuality ControlsExceptionResolutionExceptionReportsFigure 5determine the best loss mitigation option at the right time. To identify checks and balances, servicersmust be able to determine the key performance indicators (KPIs) throughout the loan’s servicinglifecycle. These KPIs should be drawn from regulations, investor preferences and servicer processes,focusing on steps within the loss mitigation program (such as decisioning, approval, denial and postworkoutmonitoring), as well as the flow between applicable loss mitigation programs.Due to a variety of constraints (technology bandwidth, multiple operational priorities, etc.), these qualitycontrols cannot always be initially implemented upfront in systems and processes. In these instances, thefocus should be on more quality control through intelligent reporting and analytics. Servicers can thenslowly move these quality controls upstream to incorporate tighter governance through processimprovements and systems enhancements.Effective mortgage loss mitigation demands a multi-pronged, risk-based approach -- gather intelligence;identify programs and campaigns; and identify exceptions and controls. We have helped implement thisapproach for a few Top 10 servicers, leading to the following benefits:■ Reduced loan losses through better business intelligence and targeted campaigns.■ Identification of the most effective loss mitigation program and campaign for each loan based onfacts.■ A sharper focus on borrowers who deliver results better and faster than others.■ Identification and resolution of process bottlenecks.With strong loan-level intelligence, targeted campaign management and quality controls, servicers can putthe right borrower in the right loss mitigation program at the right time.Ashish Shreni is also a Senior Domain Consultant within the Consumer Lending Practice of CognizantBusiness Consulting and is currently the Consumer Lending Practice Lead for Asia Pacific. He has over 10years of experience in the banking and financial services space across consulting, business processoptimization and IT project execution. He can be reached at Longfellow is also a Senior Domain Consultant within the Consumer Lending Practice of CognizantBusiness Consulting and is the North America Practice Lead for Mortgage. He has over 17 years ofexperience across the mortgage industry, including leadership roles in service delivery, operations and IT.He can be reached at REFLECTIONS 34

■ SEPA & MiFIDRethinking theBusiness Model atEuropean BanksWith regulatory changes and cost pressures -- as well as new players andlucrative opportunities -- European financial organizations need to determinewhere they fit into the new industry landscape. The focus: Outsourcing,insourcing, core value propositions and exploiting efficiencies of scale.By Sanjay BhanotThe global financial services industry is enduring a time of unprecedented crisis, but particularly hard hit arefinancial institutions in Europe. On one side, there is the impact of the credit crisis following the collapse ofthe global economy, which continues to thwart access to new capital and threaten more stringent oversight.A second force is the growing call for stricter regulations in the U.S., as these may flow to other economies.These include re-enactment of the U.S. Glass-Steagall Act -- which was repealed in 1999 and called forseparation of investment and commercial banking -- and proposals such as The Volcker Rule, which advocatesfor limiting certain trading and investment capabilities for banks. Such regulations would further impactfinancial services firms’ revenue streams and cause them to incur substantial reorganization costs. Mostbanks in Europe come from a long tradition of universal banking, and this is a strong value proposition forprivate banking/wealth management clients. A potential split of the investment bank and the commercialbank would seriously impact these organizations, as they are, by design, conceptualized as integrated entities.A third dimension in Europe is the number of directives and industry-led initiatives that are demandingsignificant spending on harmonization programs. These directives include the Markets in FinancialInstruments Directive (MiFID) on the securities and investment banking side, and Single Euro Payments Area(SEPA) in the payments arena.MiFID allows investment banks to provide services across country boundaries and abolishes the idea ofshare-trading as exclusive through national stock exchanges. SEPA enables European cross-border paymentsto be made or received with the same rights and conditions across the region. To comply, businesses needto increase reporting, data storage and audit responsibilities, which translates into new business processes,communications infrastructures and IT platforms.35 REFLECTIONS

Needless to say, the cost of complying with the regulatory requirements keeps escalating. A summary ofthese costs includes the following:■ SEPA compliance.■ MiFID “best execution” systems and processes, as well as increased reporting.■ New capital adequacy requirements, which increase capital costs.■ Capital surcharges on banks that are “too big to fail.”■ The Financial Services Authority’s focus on strengthening the Financial Services CompensationScheme.■ Stricter liquidity management norms that require banks to maintain higher balances in low-yieldgovernment securities.To comply, businesses need to increasereporting, data storage and audit responsibilities,which translates into new business processes,communications infrastructures and IT platforms.But where there is crisis, there is also opportunity. As much as the directives and harmonization initiativesare increasing the cost of doing business, they also present a significant upside to financial services players:These firms now have a pan-European passport to compete on a level field across the entire continent.European financial services organizations are free to expand their horizons and conduct business outside theirtraditional home markets.Identity CrisisSeizing these opportunities is not for the weak of heart. It requires bold decision-making that drives at theheart of financial services institutions’ understanding of where they fit into the market. With their industryin a state of flux and with many unforeseeable outcomes, banks need to be extremely introspective andrethink their identities, emerging with a fundamental shift in their business models. Essential questionsshould be explored:■ Who are my customers, partners, competitors?■ Are there functions or processes that require too large of an investment and should beaccomplished outside the organization?■ Are there areas in which an investment would launch a lucrative new business opportunity?As in many other industries, the old models just don’t cut it anymore.Such disruptive thinking is not new to the financial industry. Over the years, in response to market conditions,customer demands and regulatory requirements, financial services institutions have identified their corevalues and focused on them, while buying and outsourcing other components of the value chain.For example, the Payment Services Directive (PSD) -- which provides the necessary legal platform for SEPA-- allows a provision for new entrants to provide payment services. Organizations may qualify for paymentinstitution status and thereby compete with traditional banks in the payments services area.In some cases, with the escalating cost of compliance, banks may find it is no longer viable for them tocontinue supporting certain product lines. In others, they may decide to invest in aligning the organizationand their technology platforms and then leverage that investment to expand their reach and competitiveness. REFLECTIONS 36

Stepping Up to SEPAWe have helped several European banks in their efforts to make the needed transition tosuccessfully embrace new industry-led initiatives. For instance, we worked with a leadinginternational bank in the Netherlands to implement a SEPA credit transfer capability. As partof its transaction banking services, the bank offered an online wholesale paymentapplication that needed to be enhanced to support this directive. The bank wanted thiscapability to be completed before the January 2008 deadline.We took responsibility for the end-to-end delivery of this initiative, from requirementsassessment, to functional acceptance testing. Some of the highlights included:■ Joint formulation of the functional specifications with the subject-matter expertsat the bank.■ Interactions with the channel managers of the various countries impacted by SEPA.■ Use of solution frameworks to accomplish the job.■ Identification of value-added services.By following a stringent project management methodology, we were able to deploy theproject on-schedule. The on-time delivery ensured that the bank could benefit from an earlymoveradvantage.In another instance, a leading bank in the UK needed to enable its customers across Europeto receive and originate SEPA Direct Debits by November 2009. We managed the projectto deliver this initiative, including gathering and assessing business requirements,preparing use cases, selecting product vendors for the SEPA DD module and interactingwith and managing stakeholders of SEPA DD within the bank. Because of the on-timecompletion, the project will act as a catalyst to increase volumes of cross-border Europeanpayments for the bank.These types of decisions are launching a new era of “transaction banking,” with an emerging segregationbetween banks that are “service providers”-- with accompanying IT platforms -- and “client banks” that usethese platforms and focus on client services.At a CrossroadsSeveral institutions are upping their competitive standing by embarking on initiatives that seek to provide theplatforms and business models that will help make the pan-European harmonized market infrastructure areality. For instance:■ TARGET2 Securities (T2S): This initiative, led by the European Central Bank, is intended toservice cross-border security settlements. T2S will be a single IT platform that all Central SecurityDepositories (CSDs) can use and will enable fast and low-cost settlement of virtually all securitiescirculating in Europe, in euros and possibly other currencies.■ ClearStream’s Link Up Markets: Others are creating horizontal alliances, such as theClearStream group’s Link Up Markets, a joint venture to improve efficiency and reduce costs ofpost-trade processing of cross-border securities transactions in Europe. Participants include37 REFLECTIONS

Clearstream Banking Frankfurt, as well as the CSDs of Austria, Denmark, Greece, Norway,Spain and Switzerland. Each CSD will have direct access to the services of the other CSDs byconnecting to the infrastructure of Link Up Markets. This provides customers with direct accessto almost 50% of the European securities market, as well as consistent, best-in-class CSDsettlement and custody services. This translates into reduced cross-border transaction costs andsavings from a harmonized set of processes.With their industry in a state of flux and withmany unforeseeable outcomes, banks need tobe extremely introspective and rethink theiridentities, emerging with a fundamental shiftin their business models.■ Euroclear: This Belgium-based financial services company specializes in securities transactionsettlements and is in the final phase of its initiative to reduce the cost of settling cross-bordersecurities transactions in Europe. In addition to its role as an international CSD, the company alsoacts as the CSD for Belgian, Dutch, Finnish, French, Irish, Swedish and UK securities. Theinitiative seeks to consolidate disparate processing platforms used by the CSDs within its group.The Euroclear Single Platform (SP) initiative seeks to bring all settlement and custody servicesacross the group onto a single platform. All group clients will also use a common communicationsinterface (CCI) to communicate with the Euroclear CSD of their choice. Euroclear has alreadyachieved several milestones in its SP journey, with Single Settlement Engine going live in 2006-07; Euroclear Settlement for Eurozone Securities in 2009, bringing Dutch, Belgian and FrenchCSDs onto the same platform; and Single Platform Custody due for rollout starting 2011.■ PEACH’s: Pan-European Automated Clearing Houses (PEACH) are emerging, which conform toSEPA standards and have reach ability to banks across Europe. Some of the leading PEACH’salready established or coming up in Europe include the Euro Banking Association’s STEP 2(operated by EBA Clearing Company), VocaLink and Equens.Banks that need to offer customers SEPA servicesare taking one of two tracks: They are either overhaulingtheir payments systems to process SEPApayments for themselves, they are planning to usewhite-label services provided by other banks.These forward-looking organizations are quickly aligning with the changes at hand and are preparing theirIT and back-office operations to be at the forefront of change. By doing this, not only have they been able toinfluence the adaptation of regulatory directives where the rules have been unclear, but they also stand togain initial value share of the market.The question for the rest of the industry is whether they can similarly move into a position of superiority,taking advantage of the regulatory and compliance challenges to be proactive and supersede theircompetitors. Alternatively, are they in a better position to realign their business models to focus on theircore offerings and buy white-label services to fulfill compliance requirements? REFLECTIONS 38

For instance, banks that need to offer customers SEPA services are taking one of two tracks: They are eitheroverhauling their payments systems to process SEPA payments for themselves, or they are planning to usewhite-label services provided by other banks. Some will also look to provide payment services, perhaps ona white-label basis, to smaller banks that cannot make the business case for tooling up themselves.Build or BuyAn emerging scenario, then, is that proactive financial institutions will use their investment to provideplatform-based, white-label services to banks that are lagging or have decided to buy the services insteadof building them.This is a win-win situation, because banks that make the platform investment realize an alternative revenuestream, not only from the payment side, but also through selling the platform to other banks that want tobecome compliant quickly. And for the bank buying the white-label services, it saves on capital costs andenables it to focus on providing added value to its customers in terms of service choices and reporting. Overtime, depending on customer volumes, the bank can decide whether to stay on this course or make aninfrastructure investment at a future date.This is a win-win situation, because banks thatmake the platform investment realize an alternativerevenue stream, not only from the payment side, butalso through selling the platform to other banksthat want to become compliant quickly.In the case of SEPA compliance, it is not just small and midsize banks but also some large banks that areconsidering white-label services rather than making huge capital investments. In some cases, the factorinfluencing this decision is the timeliness for meeting the regulatory compliance requirements, as banks canincur fines and penalties and possible loss of reputation.Virtualizing the Way to Efficiency and EffectivenessTo serve end customers, financial institutions need to provide complete end-to-end processing and supportthe entire value chain. But it does not matter whether all the components of the value chain are providedinternally. What’s more, the financial services industry is quite adept with collaborative relationships andleveraged infrastructures. For instance:■ Banks have developed correspondent banking networks when they cannot be present at allfinancial centers or when it would be prohibitively expensive.■ Financial services firms have always traded on multiple stock exchanges through broker-dealerswith specific expertise in trading and local markets.■ These firms have always used agent banks, custodians and global custody to clear and settletrades in international markets.Whether customers are buying investment products, affecting an international funds transfer or putting in atrade order, they choose a financial services firm based on its product catalogue, the service conditionsprovided by the institution, its brand value and the trust that they will be served as referenced in the productcatalogue. Customers simply do not care how the business manufactures these products and services them-- whether through a layer of intermediaries, a partner bank arrangement, or through white-label services.39 REFLECTIONS

Staying in Sync Amid Continuous ChangeEuropean banks need to take strong action to stay competitive and find their place in a continuously changinglandscape. Regulatory pressures and industry-led initiatives continue to be in play and drive how the industryredefines itself. Some of the imperatives include the following:1. Rebuild trust: As a clear fallout of the financial crisis, a top agenda item is to regain client trust.This would require banks to invest in understanding customer behavior in detail, improve servicesand provide greater transparency in customer reporting, as well as disclosures.2. Prepare for change: Banks need to be responsive and flexible in embracing new businessmodels, with minimum impact on client services.3. Think alternate business models: Financial services firms that rapidly embrace innovation willfind themselves in a leading position to influence new industry operating models, as well asleverage their investment by offering services to other institutions still trying to manage the change.4. Identify core propositions: In extreme situations, financial organizations may have to makehard decisions, such as identifying their core value proposition and turning these into strategicdifferentiators, while seeking alternate ways to service non-core areas, such as outsourcing,subscription-based white-labelling, or completely exiting the non-core business altogether.5. Build differentiators: In their quest to survive in a world that is increasingly becoming flat,thanks to several pan-European harmonization initiatives, banks need to find ways to differentiatein order to attract and retain customers. This can happen through distinguished offerings, aportfolio of services, a dedicated focus on regaining trust, or expanding their horizons and movinginto a different league by becoming pan-European.Sanjay Bhanot leads Cognizant Business Consulting’s BFS practice in continental Europe and has 23-plusyears of industry experience in defining and delivering business solutions to the banking and financialservices industry. He has worked in a variety of situations, including delivering turnkey projects, productdevelopment, implementations and product management. Sanjay is an alumnus of the Indian Institute ofTechnology Delhi, class of 1985. He can be reached at REFLECTIONS 40

About CognizantCognizant’s single-minded mission is to dedicate our global technology and innovation know-how,our industry expertise and worldwide resources to working together with clients to make theirbusinesses stronger.To learn more about Cognizant, please visit: Headquarters:500 Frank W. Burr Blvd.Teaneck, NJ 07666 USAPhone: +1 201 801 0233Fax: +1 201 801 0243Toll free: +1 888 937 3277Email: inquiry@cognizant.comIndia Operations Headquarters:#5/535, Old Mahabalipuram RoadOkkiyam Pettai, ThoraipakkamChennai 600 096 IndiaPhone: +91 (0) 44 4209 6000Fax: +91 (0) 44 4209 6060Email: inquiryindia@cognizant.comEuropean Headquarters:Haymarket House28-29 HaymarketLondon SW1Y 4SP UKPhone: +44 (0) 20 7321 4888Fax: +44 (0) 20 7321 4890Email: infouk@cognizant.comChina Operations Headquarters:Cognizant Technology Solutions (Shanghai) Co., Ltd.8F, Building 5Zhangjiang Semiconductor Industrial Park3000 Long Dong BoulevardShanghai, Pudong China 201 203Phone: +86 21 6100 6466Fax: +86 21 6100 6457Email: inquirychina@cognizant.comGlobal Delivery Centers:Budapest (Hungary); Buenos Aires (Argentina); Shanghai (China); Toronto (Canada); Bangalore, Chennai, Cochin,Coimbatore, Gurgaon, Hyderabad, Kolkata, Mumbai, New Delhi, Pune (India); Boston, Chicago, Phoenix (U.S.)Regional Offices:Atlanta, Boston, Chicago, Dallas, Los Angeles, Minneapolis, Norwalk, Phoenix, San Ramon, Teaneck (U.S.);Toronto (Canada); London (UK); Frankfurt (Germany); Paris (France); Zurich, Geneva (Switzerland); Amsterdam(The Netherlands); Shanghai (China); Tokyo (Japan); Melbourne (Australia); Singapore (Singapore); Kuala Lumpur(Malaysia); Buenos Aires (Argentina); Hong Kong (China); Manila (Philippines).

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