Activities should be trimmed and go deeper

As global competition intensifies, companies regard continuous operational streamlining as vital to their competitiveness. Financial management is also expected to engage in the continuous streamlining of functions. In many organizations, basic financial management has been outsourced and global service centers are proliferating in low labor-cost countries.

While streamlining their operations, financial functions are also being expected to make a deeper and more strategic contribution to supporting and developing business activities.

Financial management is digitalizing and automating

Digitalization has rapidly transformed business activities. It has created new types of service and business models as well as new, unprecedentedly effective methods and tools for value creation.

Digitalization has also transformed financial management functions and markedly reformed practices. The pace of change continues to increase. The proliferation of automation and software robotics has accelerated data management and greatly reduced the number of human errors. Digitalization is enhancing basic financial management functions and improving accuracy and quality. Work that is independent of time and place has made work processes more flexible.

Automation of the routine tasks will free up resources for the analysis and integration of data."

With some justification, the digitalization of financial management and automation of many basic tasks are a cause of concern among financial managers. They also offer financial management experts the opportunity to use their expertise to solve complex problems, thereby generating more value for businesses. Wherever the automation of financial management reduces the human input needed in routine tasks, it will free up resources for the analysis and integration of data, while enabling a genuine focus on supporting business operations and evaluating new commercial opportunities.

However, the pressure is also mounting to develop the skills and competencies needed to succeed in this new role. Automation is leading to major changes in the job descriptions and skills required of financial managers and professionals. A new way of thinking and openness to adopting new types of work and changing practices are needed. Both organizations and individuals are responsible for developing processes and know-how to meet the growing expectations directed towards an organization's financial management.

New competence requirements for financial management

As the role of financial management changes, job descriptions and skills requirements are being transformed. A key skill is the ability to understand the relationship between financial performance and the performance of various business functions. In turn, this requires closer cooperation between financial management and other business units, in which the financial management expert primarily supports decision-making and operational management. No longer a mere producer of reports and data masses for decision-makers, the financial function is an active user and interpreter of information. The focus is shifting towards the perception and analysis of future opportunities instead of reporting historical data.

The focus is shifting towards the perception and analysis of future opportunities instead of reporting historical data."

A growing number of international rules and regulations are arising with respect to financial management and financing. Financial experts must be able to upgrade their skills and knowledge of topical issues concerning matters such as taxation, transfer pricing and international accounting standards.

While the perception and management of financial risks involve the mastery of regulations and international legislation, other business risks and their management are receiving greater emphasis in the everyday work of financial and financing experts. To prevent unpleasant surprises, in addition to identifying business opportunities financial management needs to spot potential risks and uncertainties that may disrupt business activities. This requires skill upgrades, the active following of trends and the monitoring of international economic cycles and political developments.

Deeper insight is needed into the hidden causes and effects behind financial figures, as well as the formation of phenomena such as customer value."

As the role of the financial function becomes more strategic, financial management and experts will need deeper business know-how and a broader vision of commercial success factors. Numerical skills are no longer sufficient - deeper insight is needed into the hidden causes and effects behind financial figures, as well as the formation of phenomena such as customer value.   

As the role of financial experts changes, cooperation, interaction and communications skills, and tools for shaping opinions, are growing in importance. Financial experts need to collaborate with other departments and colleagues in gathering and analyzing the relevant data from multiple sources. The ability to distinguish essential information from the data mass, summarize it and present it intuitively and persuasively to management and colleagues is taking center stage.

The financial function is an internal service provider with the task of promoting and supporting the success of an enterprise. In addition, outstanding service-mindedness will be increasingly required from the financial professionals of the future.

Finland’s current banking system dates back to the 19th century. The evolution and strengthening of national economies gradually led to the emergence of national finance systems built around central banks, national financial markets, and various kinds of financial institutions. The structure of banks was thoroughly transformed after the banking crisis in the 1990s, with a number of branch closures and dramatic cuts to personnel. Mergers in the 1990s brought about cross-border banking groups in the Nordic countries.  

More recent mergers, internationalization, advancements in information technology, growing competition, new solvency requirements, financial crime in its many forms, more sophisticated risk management techniques, liability issues, and changes in clients’ needs and behaviors have continued to reshape the banking sector in the new millennium.  

Many of today’s banks are large financial institutions offering a comprehensive portfolio of services, including insurance, finance, and traditional banking. Many banks have also begun to outsource their functions. Drawing the line between national and international operations has become increasingly difficult with banks opening branches in multiple countries and the market growing more and more international as a result of, for example, EU regulation. 

Traditional banks have been joined by a wide array of new operators in recent years. Competition in the financial market has grown increasingly fierce, which has also led to the introduction of new forms of finance. Modern financial institutions have to face off against not only national but also international competitors and more and more of the market now operates online. The definition of “financial institution” has expanded to encompass not just banks but also mortgage lenders, finance providers, credit card companies, and specialized credit institutions.  

Solvency at the Heart of Banking Regulation 

The banking sector has always been one of the most heavily regulated industries. The major financial crisis of the 2000s triggered a series of comprehensive regulatory reforms in the sector. It laid bare a number of weaknesses in international finance and forced regulators to rethink the premises of a reliable financial system. Regulation in the banking sector seeks, above all, to protect depositors and their savings. The agency responsible for protecting consumers and taxpayers from the effects and expenses of financial crises in Finland is the Financial Stability Authority. Established in 2015, the Financial Stability Authority acts as Finland’s national crisis resolution and deposit guarantee authority.

One of the most important forces driving change in the banking sector at the moment is the reform of prudential rules, which seeks to better understand the risks involved in banking and to improve banks’ own risk management systems. A major step in the right direction was taken in Finland with the adoption of the Act on Credit Institutions in 2014. Subsequent revisions and more recent regulations relate to, for example, service provision requirements and controls, administrative penalties, liquidity, leverage ratio, and capital requirements, as well as rules governing large client exposures.

Credit Regulation and Household Indebtedness 

One key problem that has emerged recently regarding lending is the rising over-indebtedness of private households, which has grown from 60% to 130% in just two decades. Most of this debt is mortgages, and the debt burden is largely concentrated in the working-age population. Over-indebtedness is not just about more and more people defaulting on their repayments but can also have a profound effect on ordinary citizens whose debts are simply disproportionate to their income. The situation is exacerbated by low-interest rates, which discourage saving.  

Mortgage lending is regulated by the European Mortgage Credit Directive (MCD), which was introduced to increase consumer protection and awareness and to make residential mortgage lenders behave more responsibly. Finva Finance and Insurance Education runs a number of online courses (“License to Operate”) focusing on the MCD, and its “Carry On” retraining programs are already used by numerous banks to educate their staff on the intricacies of mortgage lending. 

There are plans to introduce new legislative reforms and restrictions to curb over-indebtedness. One concrete solution could be a universal cap on household debt. Household debt could be capped at, for example, 4.5 times each household’s annual gross income. While this proposal has not been taken up, the maximum loan period for residential mortgages and the amount of housing company loans are being limited, and stricter regulation is being brought in for consumer credit.

Preparations are also underway for the introduction of a “positive credit register”. This will be a database containing information about private individuals’ existing loans and income that will help lenders to evaluate affordability more reliably.  

Anti-Money Laundering, Sanctions, and Customer Due Diligence 

Two concepts that are also increasingly making waves in the banking sector are KYC and AML/CTF, which refer to regulations governing know-your-customer processes and anti-money laundering and counter-terrorist financing measures respectively. Although these regulations also have implications beyond the banking and credit sector, lenders play a critical role in the prevention of money laundering in particular. Reporting requirements relating to anti-money laundering are also being tightened.

Other rising trends in the 2020s are asset freezes and sanctions. Keeping an eye on and enforcing asset-freezing and sanction lists is part of the due diligence of banking operators. It appears likely that the use of sanctions will only increase, and the nature of sanctions only grow more complex in the future.

Anti-money laundering is one of the enforcement priorities identified in the Finnish Financial Supervisory Authority’s strategy for the coming years. Scandals resulting from the ineffectiveness of current anti-money laundering efforts have featured frequently in the news in recent years. These kinds of scandals undermine consumers’ confidence in the industry. Non-compliance with sanctions can also result in significant financial penalties and reputation loss for banking operators.

Finva Finance and Insurance Education supports financial operators in knowing their customers, preventing money laundering, terrorist financing, and financial crime, and keeping abreast of the latest sanctions by offering online courses and educational seminars for the industry. 

New Payment Protocols

The turmoil and increasing regulation in the banking sector also extend to payments. Transmitting payments is crucial for the functioning of society, and banks play a key role in this. However, payment ecosystems are made up of numerous operators with diverse roles. The reform of payment protocols is driven by new methods and means of payment-enabled by technological advancement, third-party interfaces created by regulation, and changes in clients’ payment behaviors.  

Instead of cash, most payments today are made by card or online. Smartphones and contactless payment systems have taken the world by storm. The number of different technologies and means of payment is staggering. The popularity of new means of payment is hardly surprising: they are easy and quick to use, happen in real-time, and can be personalized. Technological advancement and digitalization are again to thank for all this. 

At the heart of the reform of payment protocols is the new European Payment Services Directive (PSD2). The revised Directive is causing profound and irreversible changes in the banking sector. The Directive has also expanded the scope of the Finnish Payment Services Act, which now also covers third-party service providers.  

These include what are known as Payment Initiation Service (PIS) and Account Information Service (AIS) providers. What the new provisions mean in practice is that banks now have an obligation also to give third parties access to their customers’ accounts, subject to the customer’s consent. Another notable change is the requirement to use multi-factor authentication to identify customers in the context of electronic payment services. This change has attracted new, agile, and innovative competitors to the market. Traditional banks are seeing their dominance in the market threatened by, for example, multi-disciplinary technology companies and startups. The strengths of these new kinds of operators lie especially in their ability to execute transactions in real-time and to personalize the experience. 

The market has also been flooded with an influx of alternative means of payment, such as virtual currencies developed with a view to creating a legitimate, reliable currency. The value of virtual currency is determined by the laws of supply and demand without intermediaries. The entire virtual currency system is based on mutual trust between the parties involved. One of the key characteristics of the system is anonymity. The existence of virtual currencies stems from decentralized computing and blockchain technology, which make it possible to store data and eliminate the possibility of altering them retroactively. Virtual currencies have been regulated by the Finnish Financial Supervisory Authority since 2019.

Navigating the transition with the help of Aalto EE’s extensive range of training services 

Aalto EE supports banks and financial operators by providing a wide range of educational opportunities for businesses and professionals. Our courses cover topics such as banking secrecy, customer due diligence, anti-money laundering and counter-terrorist financing, sustainable finance, creditworthiness assessment, residential lending regulation, electronic real estate transactions, credit risks, credit types, collateral, ASP agreements, corporate financing, intricacies of payment transactions and payment systems, cash flow management, farming and forestry subsidies, and debt collection.