Short term Thinking in Investment Decisions of Businesses and Financial Markets

Short term Thinking in Investment Decisions of Businesses and Financial Markets

 

When companies buyback shares and pay dividends rather than investing in new capacity, it leads to low economic growth and low aggregate demand.

Central Banks respond by cutting interest rates.  Yet Businesses do not invest in new capacity.

Many studies attribute this to short term thinking dominant in corporate investment decisions.  Pressures from shareholders push corporate managers to be short term oriented.

Many economists and thinkers have criticized this recently as advanced economies are suffering from anemic growth.

Larry Summers has invoked Secular Stagnation.  He says one of the reason for Secular Stagnation is short term thinking.

Andy Haldane of Bank of England has criticized short term thinking as it prevents investments and causes low economic growth.

Key Terms:

  • Quarterly Capitalism
  • Secular Stagnation
  • Short Term Thinking
  • Low Economic Growth
  • Business Investments
  • Real Interest Rates
  • Monetary Policy
  • Income and Wealth Inequality
  • Aggregate Demand
  • Productive Capacity
  • Productivity growth
  • Long Term Investments
  • Share Buybacks
  • Dividends
  • Corporate Cash Pools

 

Capitalism for the Long Term

The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue for the current generation of executives. Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a strong desire to return to the comfort of business as usual. But that is simply not an option. In the past three years we’ve already seen a dramatic acceleration in the shifting balance of power between the developed West and the emerging East, a rise in populist politics and social stresses in a number of countries, and significant strains on global governance systems. As the fallout from the crisis continues, we’re likely to see increased geopolitical rivalries, new international security challenges, and rising tensions from trade, migration, and resource competition. For business leaders, however, the most consequential outcome of the crisis is the challenge to capitalism itself.

That challenge did not just arise in the wake of the Great Recession. Recall that trust in business hit historically low levels more than a decade ago. But the crisis and the surge in public antagonism it unleashed have exacerbated the friction between business and society. On top of anxiety about persistent problems such as rising income inequality, we now confront understandable anger over high unemployment, spiraling budget deficits, and a host of other issues. Governments feel pressure to reach ever deeper inside businesses to exert control and prevent another system-shattering event.

My goal here is not to offer yet another assessment of the actions policymakers have taken or will take as they try to help restart global growth. The audience I want to engage is my fellow business leaders. After all, much of what went awry before and after the crisis stemmed from failures of governance, decision making, and leadership within companies. These are failures we can and should address ourselves.

In an ongoing effort that started 18 months ago, I’ve met with more than 400 business and government leaders across the globe. Those conversations have reinforced my strong sense that, despite a certain amount of frustration on each side, the two groups share the belief that capitalism has been and can continue to be the greatest engine of prosperity ever devised—and that we will need it to be at the top of its job-creating, wealth-generating game in the years to come. At the same time, there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.

Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about changing how we view business’s value and its role in society.

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.

When making major decisions, Asians typically think in terms of at least 10 to 15 years. In the U.S. and Europe, nearsightedness is the norm.

None of these ideas, or the specific proposals that follow, are new. What is new is the urgency of the challenge. Business leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public. The good news is that the reforms will not only increase trust in the system; they will also strengthen the system itself. They will unleash the innovation needed to tackle the world’s grand challenges, pave the way for a new era of shared prosperity, and restore public faith in business.

1. Fight the Tyranny of Short-Termism

As a Canadian who for 25 years has counseled business, public sector, and nonprofit leaders across the globe (I’ve lived in Toronto, Sydney, Seoul, Shanghai, and now London), I’ve had a privileged glimpse into different societies’ values and how leaders in various cultures think. In my view, the most striking difference between East and West is the time frame leaders consider when making major decisions. Asians typically think in terms of at least 10 to 15 years. For example, in my discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up with a 60-year view of his country’s future (though we settled for producing a study called National Vision 2020.) In the U.S. and Europe, nearsightedness is the norm. I believe that having a long-term perspective is the competitive advantage of many Asian economies and businesses today.

Myopia plagues Western institutions in every sector. In business, the mania over quarterly earnings consumes extraordinary amounts of senior time and attention. Average CEO tenure has dropped from 10 to six years since 1995, even as the complexity and scale of firms have grown. In politics, democracies lurch from election to election, with candidates proffering dubious short-term panaceas while letting long-term woes in areas such as economic competitiveness, health, and education fester. Even philanthropy often exhibits a fetish for the short term and the new, with grantees expected to become self-sustaining in just a few years.

Lost in the frenzy is the notion that long-term thinking is essential for long-term success. Consider Toyota, whose journey to world-class manufacturing excellence was years in the making. Throughout the 1950s and 1960s it endured low to nonexistent sales in the U.S.—and it even stopped exporting altogether for one bleak four-year period—before finally emerging in the following decades as a global leader. Think of Hyundai, which experienced quality problems in the late 1990s but made a comeback by reengineering its cars for long-term value—a strategy exemplified by its unprecedented introduction, in 1999, of a 10-year car warranty. That radical move, viewed by some observers as a formula for disaster, helped Hyundai quadruple U.S. sales in three years and paved the way for its surprising entry into the luxury market.

To be sure, long-term perspectives can be found in the West as well. For example, in 1985, in the face of fierce Japanese competition, Intel famously decided to abandon its core business, memory chips, and focus on the then-emerging business of microprocessors. This “wrenching” decision was “nearly inconceivable” at the time, says Andy Grove, who was then the company’s president. Yet by making it, Intel emerged in a few years on top of a new multi-billion-dollar industry. Apple represents another case in point. The iPod, released in 2001, sold just 400,000 units in its first year, during which Apple’s share price fell by roughly 25%. But the board took the long view. By late 2009 the company had sold 220 million iPods—and revolutionized the music business.

It’s fair to say, however, that such stories are countercultural. In the 1970s the average holding period for U.S. equities was about seven years; now it’s more like seven months. According to a recent paper by Andrew Haldane, of the Bank of England, such churning has made markets far more volatile and produced yawning gaps between corporations’ market price and their actual value. Then there are the “hyperspeed” traders (some of whom hold stocks for only a few seconds), who now account for 70% of all U.S. equities trading, by one estimate. In response to these trends, executives must do a better job of filtering input, and should give more weight to the views of investors with a longer-term, buy-and-hold orientation.

If they don’t, short-term capital will beget short-term management through a natural chain of incentives and influence. If CEOs miss their quarterly earnings targets, some big investors agitate for their removal. As a result, CEOs and their top teams work overtime to meet those targets. The unintended upshot is that they manage for only a small portion of their firm’s value. When McKinsey’s finance experts deconstruct the value expectations embedded in share prices, we typically find that 70% to 90% of a company’s value is related to cash flows expected three or more years out. If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem.

Roughly 70% of all U.S. equities trading is now done by “hyperspeed” traders—some of whom hold stocks for only a few seconds.

Some rightly resist playing this game. Unilever, Coca-Cola, and Ford, to name just a few, have stopped issuing earnings guidance altogether. Google never did. IBM has created five-year road maps to encourage investors to focus more on whether it will reach its long-term earnings targets than on whether it exceeds or misses this quarter’s target by a few pennies. “I can easily make my numbers by cutting SG&A or R&D, but then we wouldn’t get the innovations we need,” IBM’s CEO, Sam Palmisano, told us recently. Mark Wiseman, executive vice president at the Canada Pension Plan Investment Board, advocates investing “for the next quarter century,” not the next quarter. And Warren Buffett has quipped that his ideal holding period is “forever.” Still, these remain admirable exceptions.

To break free of the tyranny of short-termism, we must start with those who provide capital. Taken together, pension funds, insurance companies, mutual funds, and sovereign wealth funds hold $65 trillion, or roughly 35% of the world’s financial assets. If these players focus too much attention on the short term, capitalism as a whole will, too.

In theory they shouldn’t, because the beneficiaries of these funds have an obvious interest in long-term value creation. But although today’s standard practices arose from the desire to have a defensible, measurable approach to portfolio management, they have ended up encouraging shortsightedness. Fund trustees, often advised by investment consultants, assess their money managers’ performance relative to benchmark indices and offer only short-term contracts. Those managers’ compensation is linked to the amount of assets they manage, which typically rises when short-term performance is strong. Not surprisingly, then, money managers focus on such performance—and pass this emphasis along to the companies in which they invest. And so it goes, on down the line.

Only 45% of those surveyed in the U.S. and the UK expressed trust in business. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil.

As the stewardship advocate Simon Wong points out, under the current system pension funds deem an asset manager who returns 10% to have underperformed if the relevant benchmark index rises by 12%. Would it be unthinkable for institutional investors instead to live with absolute gains on the (perfectly healthy) order of 10%—especially if they like the approach that delivered those gains—and review performance every three or five years, instead of dropping the 10-percenter? Might these big funds set targets for the number of holdings and rates of turnover, at least within the “fundamental investing” portion of their portfolios, and more aggressively monitor those targets? More radically, might they end the practice of holding thousands of stocks and achieve the benefits of diversification with fewer than a hundred—thereby increasing their capacity to effectively engage with the businesses they own and improve long-term performance? Finally, could institutional investors beef up their internal skills and staff to better execute such an agenda? These are the kinds of questions we need to address if we want to align capital’s interests more closely with capitalism’s.

2. Serve Stakeholders, Enrich Shareholders

The second imperative for renewing capitalism is disseminating the idea that serving stakeholders is essential to maximizing corporate value. Too often these aims are presented as being in tension: You’re either a champion of shareholder value or you’re a fan of the stakeholders. This is a false choice.

The inspiration for shareholder-value maximization, an idea that took hold in the 1970s and 1980s, was reasonable: Without some overarching financial goal with which to guide and gauge a firm’s performance, critics feared, managers could divert corporate resources to serve their own interests rather than the owners’. In fact, in the absence of concrete targets, management might become an exercise in politics and stakeholder engagement an excuse for inefficiency. Although this thinking was quickly caricatured in popular culture as the doctrine of “greed is good,” and was further tarnished by some companies’ destructive practices in its name, in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of value maximization have always insisted that it is long-term value that has to be maximized.

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments. “The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

Smith’s insight into the profound interdependence between business and society, and how that interdependence relates to long-term value creation, still reverberates. In 2008 and again in 2010, McKinsey surveyed nearly 2,000 executives and investors; more than 75% said that environmental, social, and governance (ESG) initiatives create corporate value in the long term. Companies that bring a real stakeholder perspective into corporate strategy can generate tangible value even sooner. (See the sidebar “Who’s Getting It Right?”)

Creating direct business value, however, is not the only or even the strongest argument for taking a societal perspective. Capitalism depends on public trust for its legitimacy and its very survival. According to the Edelman public relations agency’s just-released 2011 Trust Barometer, trust in business in the U.S. and the UK (although up from mid-crisis record lows) is only in the vicinity of 45%. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil. The picture is equally bleak for individual corporations in the Anglo-American world, “which saw their trust rankings drop again last year to near-crisis lows,” says Richard Edelman.

How can business leaders restore the public’s trust? Many Western executives find that nothing in their careers has prepared them for this new challenge. Lee Scott, Walmart’s former CEO, has been refreshingly candid about arriving in the top job with a serious blind spot. He was plenty busy minding the store, he says, and had little feel for the need to engage as a statesman with groups that expected something more from the world’s largest company. Fortunately, Scott was a fast learner, and Walmart has become a leader in environmental and health care issues.

Tomorrow’s CEOs will have to be, in Joseph Nye’s apt phrase, “tri-sector athletes”: able and experienced in business, government, and the social sector. But the pervading mind-set gets in the way of building those leadership and management muscles. “Analysts and investors are focused on the short term,” one executive told me recently. “They believe social initiatives don’t create value in the near term.” In other words, although a large majority of executives believe that social initiatives create value in the long term, they don’t act on this belief, out of fear that financial markets might frown. Getting capital more aligned with capitalism should help businesses enrich shareholders by better serving stakeholders.

3. Act Like You Own the Place

As the financial sector’s troubles vividly exposed, when ownership is broadly fragmented, no one acts like he’s in charge. Boards, as they currently operate, don’t begin to serve as a sufficient proxy. All the Devils Are Here, by Bethany McLean and Joe Nocera, describes how little awareness Merrill Lynch’s board had of the firm’s soaring exposure to subprime mortgage instruments until it was too late. “I actually don’t think risk management failed,” Larry Fink, the CEO of the investment firm BlackRock, said during a 2009 debate about the future of capitalism, sponsored by the Financial Times. “I think corporate governance failed, because…the boards didn’t ask the right questions.”

What McKinsey has learned from studying successful family-owned companies suggests a way forward: The most effective ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure helps provide) with a significant, committed, long-term owner. Most large public companies, however, have extremely dispersed ownership, and boards rarely perform the single-owner-proxy role. As a result, CEOs too often listen to the investors (and members of the media) who make the most noise. Unfortunately, those parties tend to be the most nearsighted ones. And so the tyranny of the short term is reinforced.

The answer is to renew corporate governance by rooting it in committed owners and by giving those owners effective mechanisms with which to influence management. We call this ownership-based governance, and it requires three things:

Just 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles.

More-effective boards.

In the absence of a dominant shareholder (and many times when there is one), the board must represent a firm’s owners and serve as the agent of long-term value creation. Even among family firms, the executives of the top-performing companies wield their influence through the board. But only 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles. A government-commissioned review of the governance of British banks last year recommended an enormous increase in the time required of nonexecutive directors of banks—from the current average, between 12 and 20 days annually, to between 30 and 36 days annually. What’s especially needed is an increase in the informal time board members spend with investors and executives. The nonexecutive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to the company’s business, and 70% of that time consists of informal meetings and conversations. Four to five days a month obviously give a board member much greater understanding and impact than the three days a quarter (of which two may be spent in transit) devoted by the typical board member of a public company.

Boards also need much more relevant experience. Industry knowledge—which four of five nonexecutive directors of big companies lack—helps boards identify immediate opportunities and reduce risk. Contextual knowledge about the development path of an industry—for example, whether the industry is facing consolidation, disruption from new technologies, or increased regulation—is highly valuable, too. Such insight is often obtained from experience with other industries that have undergone a similar evolution.

In addition, boards need more-effective committee structures—obtainable through, for example, the establishment of a strategy committee or of dedicated committees for large business units. Directors also need the resources to allow them to form independent views on strategy, risk, and performance (perhaps by having a small analytical staff that reports only to them). This agenda implies a certain professionalization of nonexecutive directorships and a more meaningful strategic partnership between boards and top management. It may not please some executive teams accustomed to boards they can easily “manage.” But given the failures of governance to date, it is a necessary change.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to the decline in public esteem for business.

Companies should create real risk for executives.Some experts privately suggest mandating that new executives invest a year’s salary in the company.

CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior. When short-dated, options lead to a focus on meeting quarterly earnings estimates; even when long-dated (those that vest after three years or more), they can reward managers for simply surfing industry- or economy-wide trends (although reviewing performance against an appropriate peer index can help minimize free rides). Moreover, few compensation schemes carry consequences for failure—something that became clear during the financial crisis, when many of the leaders of failed institutions retired as wealthy people.

There will never be a one-size-fits-all solution to this complex issue, but companies should push for change in three key areas:

• They should link compensation to the fundamental drivers of long-term value, such as innovation and efficiency, not just to share price.

• They should extend the time frame for executive evaluations—for example, using rolling three-year performance evaluations, or requiring five-year plans and tracking performance relative to plan. This would, of course, require an effective board that is engaged in strategy formation.

• They should create real downside risk for executives, perhaps by requiring them to put some skin in the game. Some experts we’ve surveyed have privately suggested mandating that new executives invest a year’s salary in the company.

Redefined shareholder “democracy.”

The huge increase in equity churn in recent decades has spawned an anomaly of governance: At any annual meeting, a large number of those voting may soon no longer be shareholders. The advent of high-frequency trading will only worsen this trend. High churn rates, short holding periods, and vote-buying practices may mean the demise of the “one share, one vote” principle of governance, at least in some circumstances. Indeed, many large, top-performing companies, such as Google, have never adhered to it. Maybe it’s time for new rules that would give greater weight to long-term owners, like the rule in some French companies that gives two votes to shares held longer than a year. Or maybe it would make sense to assign voting rights based on the average turnover of an investor’s portfolio. If we want capitalism to focus on the long term, updating our notions of shareholder democracy in such ways will soon seem less like heresy and more like common sense.

While I remain convinced that capitalism is the economic system best suited to advancing the human condition, I’m equally persuaded that it must be renewed, both to deal with the stresses and volatility ahead and to restore business’s standing as a force for good, worthy of the public’s trust. The deficiencies of the quarterly capitalism of the past few decades were not deficiencies in capitalism itself—just in that particular variant. By rebuilding capitalism for the long term, we can make it stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs. The three imperatives outlined above can be a start along this path and, I hope, a way to launch the conversation; others will have their own ideas to add.

The kind of deep-seated, systemic changes I’m calling for can be achieved only if boards, business executives, and investors around the world take responsibility for bettering the system they lead. Such changes will not be easy; they are bound to encounter resistance, and business leaders today have more than enough to do just to keep their companies running well. We must make the effort regardless. If capitalism emerges from the crisis vibrant and renewed, future generations will thank us. But if we merely paper over the cracks and return to our precrisis views, we will not want to read what the historians of the future will write. The time to reflect—and to act—is now.

 

Please see my other related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

 

Key sources of Research:

Secular stagnation and low investment: Breaking the vicious cycle—a discussion paper

McKinsey

http://www.mckinsey.com/global-themes/europe/secular-stagnation-and-low-investment-breaking-the-vicious-cycle

Case Still Out on Whether Corporate Short-Termism Is a Problem

Larry Summers

http://larrysummers.com/2017/02/09/case-still-out-on-whether-corporate-short-termism-is-a-problem/

Where companies with a long-term view outperform their peers

McKinsey

http://www.mckinsey.com/global-themes/long-term-capitalism/where-companies-with-a-long-term-view-outperform-their-peers

How short-term thinking hampers long-term economic growth

FT

https://www.ft.com/content/8c868a98-b821-11e4-b6a5-00144feab7de

Anthony Hilton: Short-term thinking hits nations as a whole, not just big business

http://www.standard.co.uk/comment/comment/anthony-hilton-short-term-thinking-hits-nations-as-a-whole-not-just-big-business-10427294.html

Short-termism in business: causes, mechanisms and consequences

EY Poland Report

http://www.ey.com/Publication/vwLUAssets/EY_Poland_Report/$FILE/Short-termism_raport_EY.pdf

Overcoming the Barriers to Long-term Thinking in Financial Markets

Ruth Curran and Alice Chapple
Forum for the Future

https://www.forumforthefuture.org/sites/default/files/project/downloads/long-term-thinking-fpf-report-july-11.pdf

Understanding Short-Termism: Questions and Consequences

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Understanding-Short-Termism.pdf

Ending Short-Termism : An Investment Agenda for Growth

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Ending-Short-Termism.pdf

The Short Long

Speech by
Andrew G Haldane, Executive Director, Financial Stability, and Richard Davies

Brussels May 2011

http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech495.pdf

Capitalism for the Long Term

Dominic Barton

From the March 2011 Issue

https://hbr.org/2011/03/capitalism-for-the-long-term

Quarterly capitalism: The pervasive effects of short-termism and austerity

https://currentlyunderdevelopment.wordpress.com/2016/05/10/quarterly-capitalism-the-pervasive-effects-of-short-termism-and-austerity/

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

http://www.wlrk.com/docs/IsShortTermBehaviorJeopardizingTheFutureProsperityOfBusiness_CEOStrategicimplications.pdf

Andrew G Haldane: The short long

Speech by Mr Andrew Haldane, Executive Director, Financial Stability, and Mr Richard
Davies, Economist, Financial Institutions Division, Bank of England,
at the 29th Société
Universitaire Européene de Recherches Financières Colloquium,
Brussels, 11 May 2011

http://www.bis.org/review/r110511e.pdf

THE UNEASY CASE FOR FAVORING LONG-TERM SHAREHOLDERS

Jesse M. Fried

https://dash.harvard.edu/bitstream/handle/1/17985223/Fried_795.pdf?sequence=1

The fringe economic theory that might get traction in the 2016 campaign

https://www.washingtonpost.com/news/wonk/wp/2015/03/02/the-fringe-economic-theory-that-might-get-traction-in-the-2016-campaign/?utm_term=.932bc0b97758

FCLT Global:  Focusing Capital on the Long Term

Publications

http://www.fcltglobal.org/insights/publications

Finally, Evidence That Managing for the Long Term Pays Off

Dominic Barton

James Manyika

Sarah Keohane Williamson

February 07, 2017 UPDATED February 09, 2017

https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

Focusing Capital on the Long Term

Dominic Barton

Mark Wiseman

From the January–February 2014 Issue

Is Corporate Short-Termism Really a Problem? The Jury’s Still Out

Lawrence H. Summers

February 16, 2017

Yes, Short-Termism Really Is a Problem

Roger L. Martin

October 09, 2015

Long-Termism or Lemons

The Role of Public Policy in Promoting Long-Term Investments

By Marc Jarsulic, Brendan V. Duke, and Michael Madowitz October 2015

Center for American Progress

https://cdn.americanprogress.org/wp-content/uploads/2015/10/21060054/LongTermism-reportB.pdf

 

Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

https://corpgov.law.harvard.edu/2009/09/11/overcoming-short-termism-a-call-for-a-more-responsible-approach-to-investment-and-business-management/

 

 

Focusing capital on the Long Term

Jean-Hugues Monier – Senior Parter – McKinsey & Company

Princeton University – November 2016

http://jrc.princeton.edu/sites/jrc/files/jean-hugues_j._monier_slides_final.pdf

Hierarchy Theory in Biology, Ecology and Evolution

Hierarchy Theory in Biology, Ecology and Evolution

 

I have always been intrigued by multi-level thinking whether it is in organizations, biology, ecology, and evolutionary theory.

  • Plant – Division – Corporate – Industry – Macro-economy
  • Molecules – Organelles – Cells – Tissue – Organs – Whole body
  • Organism – Populations – Communities – Ecosystem –  Bio-Sphere

 

How does human body forms from Molecules?  Is it all evolutionary?  or is there a role for Vitalism?

How to integrate decision making in organizations at multi levels?  From Corporate level to Plant Level.

How does an Individual fits in Groups, Communities, Society, and Ecosystem?

What is the role of fractals thinking in Evolutionary Biology?

 

A SUMMARY OF THE PRINCIPLES OF HIERARCHY THEORY

The Hierarchy theory is a dialect of general systems theory. It has emerged as part of a movement toward a general science of complexity. Rooted in the work of economist, Herbert Simon, chemist, Ilya Prigogine, and psychologist, Jean Piaget, hierarchy theory focuses upon levels of organization and issues of scale. There is significant emphasis upon the observer in the system.

Hierarchies occur in social systems, biological structures, and in the biological taxonomies. Since scholars and laypersons use hierarchy and hierarchical concepts commonly, it would seem reasonable to have a theory of hierarchies. Hierarchy theory uses a relatively small set of principles to keep track of the complex structure and a behavior of systems with multiple levels. A set of definitions and principles follows immediately:

Hierarchy: in mathematical terms, it is a partially ordered set. In less austere terms, a hierarchy is a collection of parts with ordered asymmetric relationships inside a whole. That is to say, upper levels are above lower levels, and the relationship upwards is asymmetric with the relationships downwards.

Hierarchical levels: levels are populated by entities whose properties characterize the level in question. A given entity may belong to any number of levels, depending on the criteria used to link levels above and below. For example, an individual human being may be a member of the level i) human, ii) primate, iii) organism or iv) host of a parasite, depending on the relationship of the level in question to those above and below.

Level of organization: this type of level fits into its hierarchy by virtue of set of definitions that lock the level in question to those above and below. For example, a biological population level is an aggregate of entities from the organism level of organization, but it is only so by definition. There is no particular scale involved in the population level of organization, in that some organisms are larger than some populations, as in the case of skin parasites.

Level of observation: this type of level fits into its hierarchy by virtue of relative scaling considerations. For example, the host of a skin parasite represents the context for the population of parasites; it is a landscape, even though the host may be seen as belonging to a level of organization, organism, that is lower than the collection of parasites, a population.

The criterion for observation: when a system is observed, there are two separate considerations. One is the spatiotemporal scale at which the observations are made. The other is the criterion for observation, which defines the system in the foreground away from all the rest in the background. The criterion for observation uses the types of parts and their relationships to each other to characterize the system in the foreground. If criteria for observation are linked together in an asymmetric fashion, then the criteria lead to levels of organization. Otherwise, criteria for observation merely generate isolated classes.

The ordering of levels: there are several criteria whereby other levels reside above lower levels. These criteria often run in parallel, but sometimes only one or a few of them apply. Upper levels are above lower levels by virtue of: 1) being the context of, 2) offering constraint to, 3) behaving more slowly at a lower frequency than, 4) being populated by entities with greater integrity and higher bond strength than, and 5), containing and being made of – lower levels.

Nested and non-nested hierarchies: nested hierarchies involve levels which consist of, and contain, lower levels. Non-nested hierarchies are more general in that the requirement of containment of lower levels is relaxed. For example, an army consists of a collection of soldiers and is made up of them. Thus an army is a nested hierarchy. On the other hand, the general at the top of a military command does not consist of his soldiers and so the military command is a non-nested hierarchy with regard to the soldiers in the army. Pecking orders and a food chains are also non-nested hierarchies.

Duality in hierarchies: the dualism in hierarchies appears to come from a set of complementarities that line up with: observer-observed, process-structure, rate-dependent versus rate-independent, and part-whole. Arthur Koestler in his “Ghost in The Machine” referred to the notion of holon, which means an entity in a hierarchy that is at once a whole and at the same time a part. Thus a holon at once operates as a quasi-autonomous whole that integrates its parts, while working to integrate itself into an upper level purpose or role. The lower level answers the question “How?” and the upper level answers the question, “So what?”

Constraint versus possibilities: when one looks at a system there are two separate reasons behind what one sees. First, it is not possible to see something if the parts of the system cannot do what is required of them to achieve the arrangement in the whole. These are the limits of physical possibility. The limits of possibility come from lower levels in the hierarchy. The second entirely separate reason for what one sees is to do with what is allowed by the upper level constraints. An example here would be that mammals have five digits. There is no physical reason for mammals having five digits on their hands and feet, because it comes not from physical limits, but from the constraints of having a mammal heritage. Any number of the digits is possible within the physical limits, but in mammals only five digits are allowed by the biological constraints. Constraints come from above, while the limits as to what is possible come from below. The concept of hierarchy becomes confused unless one makes the distinction between limits from below and limits from above. The distinction between mechanisms below and purposes above turn on the issue of constraint versus possibility. Forget the distinction, and biology becomes pointlessly confused, impossibly complicated chemistry, while chemistry becomes unwieldy physics.

Complexity and self-simplification: Howard Pattee has identified that as a system becomes more elaborately hierarchical its behavior becomes simple. The reason is that, with the emergence of intermediate levels, the lowest level entities become constrained to be far from equilibrium. As a result, the lowest level entities lose degrees of freedom and are held against the upper level constraint to give constant behavior. Deep hierarchical structure indicates elaborate organization, and deep hierarchies are often considered as complex systems by virtue of hierarchical depth.

Complexity versus complicatedness: a hierarchical structure with a large number of lowest level entities, but with simple organization, offers a low flat hierarchy that is complicated rather than complex. The behavior of structurally complicated systems is behaviorally elaborate and so complicated, whereas the behavior of deep hierarchically complex systems is simple.

Hierarchy theory is as much as anything a theory of observation. It has been significantly operationalized in ecology, but has been applied relatively infrequently outside that science. There is a negative reaction to hierarchy theory in the social sciences, by virtue of implications of rigid autocratic systems or authority. When applied in a more general fashion, even liberal and non-authoritarian systems can be described effectively in hierarchical terms. There is a politically correct set of labels that avoid the word hierarchy, but they unnecessarily introduce jargon into a field that has enough special vocabulary as it is.

A SHORT ANNOTATED BIBLIOGRAPHY OF HIERARCHY THEORY.

This bibliography is in chronological order, so that the reader can identify the early classics as opposed to the later refinements. If you must choose just one book to read, turn to the last reference in this bibliography, Ahl and Allen, 1996. Simon, H.. A. 1962. The architecture of complexity. Proceedings of the American philosophical society 106: 467-82. This is the foundation paper of hierarchy theory originating from an economist. It was a re-published in “Sciences of the Artificial” by Simon. It introduces the idea of near-decomposability. If systems were completely decomposable, then there would be no emergent whole, because the parts would exist only separately. The “near” in near-decomposable allows the upper level to emerge from the fact that the parts anre not completely separate.

Koestler, Arthur. 1967. The ghost in the machine. Macmillan, New York. This is a long hard look at human social structure in hierarchical terms. The notion of holon first occurs in this work. This is a classic work, but is easily accessible to the lay public.

Whyte, L.. L.., A. G. Wilson and D. Wilson (eds.). 1969. Hierarchical structures. American Elsevier, New York. This is a classic collection of early scholarly works by some of the founders of hierarchical thinking.

Pattee, H.. H. (ed.) 1973. Hierarchy theory: the challenge or complex systems. Braziller, New York. This edited volume has some classic articles by Pattee, Simon and others.

Allen, T. F. H. and T. B. Starr. 1982. Hierarchy: perspectives for ecological complexity. University Chicago Press. This book has a significant ecological component but is much more generally about hierarchical structure. It is abstract and a somewhat technical treatment but has been the foundation work for the application of hierarchy theory in ecology and complex systems theory at large.

Salthe, S. 1985. Evolving Hierarchical Systems: their structure and representation. Columbia University Press, New York. This book has a strong structural bias, in contrast to the process oriented approach of Allen and the other ecologists in this bibliography. Salthe introduces the notion of the Triadic, where there is a focus on 1) the system as both a whole above the levels below and 2) a part belonging to another level above, 3) not forgetting the level of the structure itself in between. While much biological hierarchy theory takes an anti-realist point view, or is at least reality-agnostic, wherein the ultimate reality of hierarchical arrangement is left moot, Salthe’s version of hierarchy theory is concerned with the ultimate reality of structure. The anti-realist view of structure is that it is imposed by the observer, and may or may not correspond to any ultimate reality. If structure does correspond to ultimate, external reality, we could never know that to be so. Salthe’s logic is consistent but always takes a structural and ontological position.

O’Neill, R. V., D. DeAngelis, J. Waide and T. F. H. Allen. 1986. A hierarchical concept of ecosystems. Princeton University Press. This is a distinctly ecological application of hierarchy theory, making the critical distinction between process functional ecosystem approaches as opposed to population and community relationships. It is an application of hierarchy theory to ecosystem analysis.

Allen T. F. H. and T. Hoekstra. 1992. Toward a unified ecology. Columbia University Press. This book turns on hierarchy theory, but is principally a book about ecology. It goes beyond the O’Neill et al book, in that it makes the distinction between many types of ecology (landscape, ecosystem, community, organism, population, and biomes) on the one hand, and scale of ecology on the other hand. It ends with practical applications of hierarchy theory and ecological management.

Ahl, V. and T. F. H. Allen. 1996. Hierarchy theory, a vision, vocabulary and epistemology. Columbia University Press. This slim a volume is an interdisciplinary account of a hierarchy theory, and represents the shallow end of the pool. It is the primer version of Allen and Starr 1982. It is full of graphical images to ease the reader into a hierarchical perspective. It makes the distinction between levels of organization and levels of observation. It takes a moderate anti-realist point of view, wherein there may be an external reality, but it is not relevant to the discourse. We only have access to experience, which must of necessity involve observer values and subjectivity. There are examples from a wide discussion of many disciplines. Included are examples from psychology, ecology, the law, political systems and philosophy. It makes reference to the global and technological problems facing humanity, and offers hierarchy theory as one tool in the struggle. The summary of hierarchy theory in the opening paragraphs above comes from this book.

This summary was compiled by

Timothy F. Allen, Professor of Botany,
University of Wisconsin Madison,
Madison Wisconsin 53706 — 1381.
Email – tfallen@facstaff.wisc.edu

 

 

Key People:

  • James Grier Miller
  • Howard Pattee
  • Stanley Salthe
  • T F Allen
  • Herbert Simon
  • NILES ELDREDGE
  • CS Holling

 

 

Key Sources of Research:

 

A SUMMARY OF THE PRINCIPLES OF HIERARCHY THEORY

T Allen

http://www.isss.org/hierarchy.htm

http://www.botany.wisc.edu/allenlab/AllenLab/Hierarchy.html

 

 

Hierarchy Theory

Paweł Leśniewski

 

http://www.uni-kiel.de/ecology/users/fmueller/salzau2006/ea_presentations/Data/2006-06-28_-_Hierarchy_Theory.pdf

 

 

Summary of the Principles of Hierarchy Theory

S.N. Salthe

 

http://www.nbi.dk/~natphil/salthe/Summary_of_the_Principles_o.pdf

 

 

HOWARD PATTEE’S THEORETICAL BIOLOGY:

A RADICAL EPISTEMOLOGICAL STANCE TO APPROACH LIFE, EVOLUTION ANDCOMPLEXITY.

Jon Umerez

 

http://www.informatics.indiana.edu/rocha/publications/pattee/umerez.pdf

 

 

 

Hierarchy Theory as the Formal Basis of Evolutionary Theory

 

http://www.bbk.ac.uk/tpru/StephenWood/Publications/HierarchyTheoryastheFormalBasisofEvolutionaryTheory.pdf

 

 

The Concept of Levels of Organization in the Biological Sciences

 

PhD Thesis Submitted August 2014 Revised June 2015

Daniel Stephen Brooks

 

http://d-nb.info/1082033960/34

 

 

A spatially explicit hierarchical approach to modeling complex ecological systems: theory and applications

Jianguo Wu , John L. David

 

http://leml.asu.edu/jingle/Web_Pages/Wu_Pubs/PDF_Files/Wu_David_2002.PDF

 

 

What is the Hierarchy Theory of Evolution?

 

http://hierarchygroup.com/wp-content/uploads/2014/07/What-Is-The-Hierarchy-Theory.pdf

 

 

HIERARCHICAL ORGANIZATION OF ECOSYSTEMS

Jackson R. Webster

 

http://coweeta.uga.edu/publications/274.pdf

 

 

Ecological hierarchies and self-organisation – Pattern analysis, modelling and process integration across scales

Hauke Reutera,, Fred Jopp, José M. Blanco-Morenod, Christian Damgaarde, Yiannis Matsinosf, Donald L. DeAngelis

 

http://izt.ciens.ucv.ve/ecologia/Archivos/ECO_POB%202010/ECOPO1_2010/Reuter_etal_BAAE%202010.pdf

 

 

Levels of organization in biology: on the nature and nomenclature of ecology’s fourth level

William Z. Lidicker, Jr

 

http://www.uff.br/ecosed/Artigo4.pdf

 

 

Chapter 24

Hierarchy Theory: An Overview

Jianguo Wu

 

http://izt.ciens.ucv.ve/ecologia/Archivos/ECO_POB%202016/ECOPO7_2016/Jorgensen%20et%20al%202016.pdf

 

 

Heterarchies: Reconciling Networks and Hierarchies

Graeme S. Cumming

https://www.researchgate.net/publication/303508940_Heterarchies_Reconciling_Networks_and_Hierarchies

 

 

Evolutionary Theory

A HIERARCHICAL PERSPECTIVE

EDITED BY NILES ELDREDGE, TELMO PIEVANI, EMANUELE SERRELLI, AND ILYA TEMKIN

 

 

Holons, creaons, genons, environs, in hierarchy theory: Where we have gone

Timothy Allen, Mario Giampietro

http://www.sciencedirect.com/science/article/pii/S0304380014002993

 

 

The Evolutionary Foundations of Hierarchy: Status, Dominance, Prestige, and Leadership

Mark van Vugt & Joshua M. Tybur

http://www.professormarkvanvugt.com/images/files/Handbook_of_Evolutionary_Psychologymvv2014rev.pdf

 

 

The Microfoundations of Macroeconomics: An Evolutionary Perspective

Jeroen C.J.M. van den Bergh

John M. Gowdy

 

https://papers.tinbergen.nl/00021.pdf

 

 

Understanding the complexity of Economic, Ecological, and Social Systems

C S Holling

http://www.esf.edu/cue/documents/Holling_Complexity-EconEcol-SocialSys_2001.pdf

 

 

Hierarchical Structures

Stanley N. Salthe

 

https://www.researchgate.net/profile/Salthe_Stanley/publication/257522907_Hierarchical_Structures/links/5768411408ae7f0756a2248c.pdf

 

 

Two Frameworks for Complexity Generation in Biological Systems

Stanley N. Salthe

 

http://www.nbi.dk/natphil/salthe/A-life_Conf_paper_Word.pdf

http://www.nbi.dk/~natphil/salthe/_publ_classified_by_topic.pdf

 

 

Spatial scaling in ecology

J. A. WIENS

 

http://www.functionalecology.org/SpringboardWebApp/userfiles/fec/file/Spatial%20scaling%20in%20ecology%20v3%20n4.pdf

 

 

The Spirit of Evolution

by Roger Walsh

An overview of Ken Wilber’s book Sex, Ecology, Spirituality: The Spirit of Evolution (Shambhala, 1995).

http://cogweb.ucla.edu/CogSci/Walsh_on_Wilber_95.html

Structure and Evolution of EFT Payment Networks in the USA, India, and China

Structure and Evolution of EFT Payment Networks in the USA, India, and China

Payments Systems are going through revolution particularly in developing countries.  Since they lack the infrastructure to follow traditional options, they are opting for innovative solutions using mobile technologies and are attempting to leapfrog.  Networks through which payment transactions are processed are equally important.

Below is a brief introduction to EFT networks used in payments industry in USA, India and China.

 

From A Guide to Debit and ATM Card Industry

EFT (Electronic Funds Transfer) Networks in USA

EFT networks are the telecommunications and payments infrastructure linking consumers, ATMs, merchants, and banks. The physical components consist of ATMs, POS terminals, telecommunication connections, apparatus that route transaction information to appropriate parties, and computers that store deposit and transaction information. Two characteristics of an EFT network distinguish it from other payments systems that may use similar physical components. First, transactions are PIN-based. Second, consumer accounts are immediately debited (funds are immediately transferred from demand deposit accounts).

There are two types of EFT transactions. The first are ATM transactions. The second are online debit transactions at POS terminals. EFT networks can be used for either ATM transactions or online POS debit card payments or both. In practice, most EFT networks process ATM transactions, and a subset of these also processes POS transactions. A few EFT networks have been devoted solely to POS transactions.

EFT networks are typically separated into two types. Regional EFT networks serve specified regions of the United States. There are three large regional networks: NYCE, Star, and Pulse. The NYCE network serves primarily the Northeast and Midwest, Star serves the West and the midsouth Atlantic regions, and Pulse serves the Central and Southern regions. Today it is something of a misnomer to call these large networks regional because they have grown to the point of near-national coverage. Examples of smaller regional networks include Shazam, located primarily in the Midwest, and Presto, serving the Southeast.

National networks are fewer in number than regional network but are distinguished by their national territory. National territory does not necessarily translate into large size. The Armed Forces Financial Network is comparable in size to some of the larger regional networks, but its mission of serving the armed forces community leads it to a national geographic territory. Visa and MasterCard operate EFT networks that are truly national in size and territory. Each uses its own physical infrastructure to run ATM and POS transactions, and for marketing purposes their ATM and POS networks carry different names. Visa’s Plus and MasterCard’s Cirrus are ATM networks, while Visa’s Interlink and MasterCard’s Maestro are POS networks.

Another important distinction for national networks is that they may serve as a bridge between regional networks. If a transaction conducted on a regional network is initiated using a card from another regional network, a national network may link the two regional networks so that the transaction information may be routed from one regional network to the other. In a sense, national networks serve as networks of networks.

There are many types of ownership and membership structures among EFT networks. A single bank may own a shared network, but ownership by multiple banks is more common, a legacy of the fact that many of the first shared networks were typically joint ventures among banks. Some of these joint ventures included many banks, while others had a few. Nonbank ownership of networks ranges from complete ownership of the network (as with Concord EFS’s Star network) or as a joint venture with banks (such as First Data and NYCE).

Membership in an EFT network is typically limited to financial institutions (banks, savings institutions, and credit unions) and can be, but is not necessarily, tied to ownership.

Offline debit card networks

The second component of the ATM and debit card infrastructure is offline debit card networks. Offline debit card networks are a telecommunications/payments infrastructure linking consumers, merchants, and banks. There are two offline debit card networks, one run by Visa and the other by MasterCard, which essentially piggyback off the card associations’ credit card networks. Visa has named its offline debit product Visa Check Card and MasterCard refers to its product as MasterMoney.

The physical components of the offline debit network consist of POS terminals, telecommunication connections, apparatus that route transaction information to appropriate parties, and computers that store deposit and transaction information. Information necessary for the authorization of an offline debit transaction as well as information for processing the payment follow the same infrastructure routes as for credit card transactions.

Two characteristics distinguish offline debit transactions. First, transactions are signature- based. Second, consumer accounts are debited one or two days after the transaction (that is, there is a lag before funds are deducted from demand deposit accounts).

To complete this section, it may be useful to emphasize the similarities and differences between online and offline debit transactions. Both transactions are conducted at a POS terminal. Both represent payments in exchange for goods or services. But online debit requires the use of a PIN and funds are debited immediately, while offline debit does not require a PIN and funds are not debited immediately. Online debit transactions are processed over an EFT network. By contrast, offline debit transactions are processed over credit card networks. Online debit allows the consumer to obtain cash back at the point of sale, while offline debit does not. Finally, consumers and merchants face differing fees for online and offline debit (detailed in Chapter 4).

 

From Point of Sale (POS) Systems and Security

pos1pos2

 

Debit Cards and ATM Networks

A.  Regional EFT Interbank Networks

  • Concord STAR
  • NYCE
  • Pulse
  • Shazam
  • Presto

B.  National EFT Interbank Networks

  • Visa Plus
  • Mastercard Cirrus

C.  Hardware

  • ATM Machines

 

Debit POS (Point of Sale) Networks (PIN based)

Transactions are processed over EFT Network

A.  Networks

  • Visa Interlink
  • Mastercard Maestro

B.  Hardware

  • VeriFone
  • FirstData
  • Ingenico
  • Eposnow (iPad)
  • DucePos (iPad)
  • Revel (iPad)
  • ShopKeep (iPad)
  • Instore (iPad)
  • Lavu (iPad)
  • OrderBird (iPad)
  • Touch Bistro (iPad)
  • SalesVu (iPad)

 

Offline Debit Card Networks (Signature Based)

Transactions are processed over Credit Card Networks

  • Visa Check Card
  • Mastercard MasterMoney

 

 

EFT Networks in India

India is mostly cash based economy.  Manual Paper based and Wooden Drawer based Cash Registers are the predominant form of payment transactions systems.

In last few years, many innovative solutions have come up but penetration is very low.

Issues of Data Privacy and Cybersecurity are not yet on the minds of Developers of these new solutions.

Regulations and Oversight of these newer platforms is non existent.

People use debit cards predominant to withdraw cash from ATM machines.  Online payment transactions are done for paying utilities bills and making bookings for Air, Train, and Bus Transportations.  Credit cards are used by very small segment of people in cities.

 

From Innovative payment systems for financial inclusion

Innovative payment systems for financial inclusion

  • Over INR 8743 bn in payments to be made through prepaid Instruments in FY20
  • India Point of sale terminals lowest amongst BRIC nations
  • Overall business opportunity for business correspondents estimated at INR 567 bn per year and revenue opportunity for POS –related shared services at INR 16 bn per year

24 OCTOBER DELHI/MUMBAI:

Disruptive game changing innovations in the payment systems will be critical to accelerate financial inclusion agenda of India, states a latest report on financial inclusion by EY, the global professional services organization. The report titled ‘Accelerating financial inclusion- The role of payment systems’, was released at a global conference on Financial Inclusion and Payment Systems in Delhi today.

The report aims to provide an outlook on India’s financial inclusion agenda, the growth drivers for its success and the supporting infrastructure that will be needed. As per the report, with current trends like growing urbanization, rising middle class and aspirations, this is the right time to tap the large unbanked population of India.

Mahesh Makhija, Partner – Advisory (Financial Services), EY says, “India is an exceptional country with unique consumer needs. To accelerate financial inclusion in India, we will need to understand what combination of payment products and services will work in the Indian context. Innovations in payment systems will occur at the intersection of different industries like financial services, telecom and retail.”

The report lists 6 key elements that make up the financial inclusion agenda of India:

New game, new rules — evolving prepaid instruments landscape in India

Prepaid Instruments (PPI) are at their nascent stage in India, but have the potential to play a vital role in the country’s struggle to reduce dependence on cash in its economy, says the report. EY estimates that although prepaid market represented only 3.62% of the Indian card market, this will increase dramatically over the next decade. EY recommends that the Government look closely at PPI’s as an option to disburse Government benefits (currently estimated at INR 4800 billion). Market growth in PPI’s will also emanate from the proliferation of m-wallets, money transfer and other new applications of the product. According to the report, these new segments are expected to collectively contribute 47% of the prepaid market in FY 20. Over INR 8743 billion in payments is likely to be made through PPIs in FY 2020. This will be more than 12 times the volumes in FY2013.

Rethinking mobile money — the case for electronic rupees issued by the RBI

Mobile money has the power to democratize banking in India by bringing large numbers of the country’s unbanked population into its formal financial system. As per the report, almost 83% of India’s population is expected to own and use mobile phones by 2014. However, for several reasons mobile money adoption in India has been low. Consumers and merchants are not incentivized to make the transition to mobile money and Banks and Telco’s have adopted a ‘wait and watch’ approach. According to the report, the challenge is to take a transformative step that will lead to a paradigm shift in the mobile money paradigm. One such step would be creation of electronic rupee. These would be issued by the Reserve Bank of India as legal tender, just as it currently issues currency notes and coins.

“We think that the creation of electronic rupee is a transformative solution to today’s issues with mobile money in India and in fact across the globe” said Mahesh.

Enabling payments —increasing Point Of Sales (POS) penetration in India

As financial inclusion gathers momentum, there is an urgent need to enhance POS acceptance infrastructure in India. India still has one of the lowest number of POS terminals (per million people) in the world. According to the report, penetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS. Moreover, only 1.1 million of the more than 10 million retail touch points have POS installed for electronic payments acceptance. Technology will play an important role with the implementation of new POS capabilities. Large urban retailers seek technologies like Mobile POS (Mpos) which help them in “line-busting” whereas the smaller merchants seek a cheap and easy-to-use solution like a card-reader attached to a phone. Rural merchants on the other hand are likely to adopt biometric POS terminals, which enables them to accept Aadhaar enabled debit cards that are likely be issued in large numbers for financial inclusion. As per the report, there could be close to 3.5 million POS in the next five years if necessary initiatives and actions are taken to increase the POS penetration.

Evolving payment ecosystems – shared services models for inclusion and growth

The report states that to enhance their reach, banks are introducing payment ecosystems that work across organizational boundaries to deliver innovative payment services. The report discusses 7 different models of shared services that Banks are leveraging aimed at acquiring, engaging and retaining customers. EY estimates the overall opportunity for shared services like business correspondents at around INR567 billion per year in the next 2-3 years and an overall revenue opportunity of INR16 billion per year for POS-related shared services by 2018 at the present rate of growth in card-related transactions and merchant terminals.

Pathways to excellence — the transformation agenda for banks

Changing consumer behavior, the increasing urgency of financial inclusion and ubiquitous mobile telephony are powerful external factors that will transform the Indian payments industry over the next 10 years. In the last decade, India has witnessed significant achievements in its efforts to migrate from traditional payment methods through cash to modern electronic payment systems. In 2012 the percentage of non-paper based payments transactions was 48% up from 27% in 2008. While there has been significant progress made on various parameters, a lot still needs to be done in the next few years. According to the report, India is at an interesting point in its payments journey wherein the foundation is laid, but its future growth will depend on innovation in products, business models, consumer interfaces, security and infrastructure under the umbrella of enabling regulations.

Cashless in India – Government imperatives to promote electronic payments

From taxes to social welfare benefits, the Government of India cumulatively receives and disburses billions of rupees to and from its citizens. The Interbank Mobile Payment Service and Aadhaar Enabled Payment System platforms have the potential to integrate the payment systems of various Government to Public (G2P) schemes and enable mobile phones to be used as front-end technology instruments states the report.

By digitizing this flow of money, the Government can lead a strategic shift from the high dependence on cash to a more efficient, electronic payment system, which leverages online and mobile channels to cut costs and bring social benefits to millions.

The establishment of a strong payment and settlement framework and associated enabling institutions has aided a conducive environment for financial inclusion in India.

 

From Why it is difficult to scale POS machines in India

Why it is difficult to scale POS machines in India

Shashidhar KJ October 19, 2016

Earlier this month, the Reserve Bank of India (RBI) said it would be setting up an acceptance development fund (ADF) to boost the card payment infrastructure in the country. The proposed ADF which will be funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund. Money from the fund is then invested in structured initiatives to expand acceptance infrastructure such as POS terminals.

We have the dubious honour of having one of the lowest POS terminal penetration, according to an Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.

This was back in 2015 and the number of POS machines issued from banks has improved to over 14 lakh in July, as shown by RBI data.

Isn’t it odd that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country?

Indeed, the RBI, in its concept paper to boost card acceptance, points out that people primarily used their debit cards to withdraw money from ATMs.

Closer look at POS terminal data

However, a if we look at closer at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.

The RBI counts 56 scheduled commercial banks in the country. Not to mention that there are 56 functioning regional rural banks and 93 cooperative banks.

It’s interesting to note that the banks mentioned above generally have a well developed credit card business portfolios which contribute to their balance sheet in a significant way.

Enter the MDR

An explanation for the skew of POS terminals within these banks could be that they get to charge merchants a higher merhcant discount rate (MDR), an inter-bank interchange fee, for credit card transactions.

The MDR is fee collected by banks from merchants for a card transaction. When a customer uses a HDFC Bank credit card on a POS terminal, the merchant is charged a fee to settle the payment in another bank.

Typically banks charge around 2-2.5% per transaction on credit cards. However, the RBI has capped the MDR for debit cards at 0.75% for transactions below Rs 2,000 and 1% for transactions above Rs 2,000.

The devil, however, lies in how the MDR is split between the bank issuing the card and bank accepting the payment. For credit cards, the issuing bank gets around 1.8% of the 2-2.5% MDR. Meanwhile for debit card transactions, issuing banks make around 0.5% out of the 0.75% interchange fee.

No incentive to develop the system

Currently, other banks (public, regional and cooperative banks) have no incentive to develop card acceptance networks. They are not interested or do not have the expertise to develop a credit card business to command a higher MDR. They would rather have their customers use debit cards as a dumb instrument to withdraw cash at ATMs instead.

Rahul Kothari, vice president and head of business at PayUbiz explained that banks look at POS as a means to retain customers through current accounts and offer them other products.He added that right now there is no level playing field between third party companies who develop POS solutions and banks. RBI guidelines say that third party companies need to take permission from banks to process POS payments, Kothari added.

Third party POS players in India include PayU, MSwipe, Ezetap and Oxigen.

Industry sources also pointed out that banks charge around 5-10 basis points (bps) for getting a bill of sponsorship to handle POS payments. MediaNama was unable to independently verify this.

What needs to be done

There needs to be a more equitable distribution of the MDR between banks which will open up competition between smaller banks who will now have a reason to build their card acceptance networks. To an extent, the ADF aims to do that by taking a portion of the fees got by the issuing bank and put it into a corpus to get more POS terminals in the country.

However, the RBI should ensure that the proceeds of the fund should go to banks who do not have a proper card acceptance network.

Secondly, third party POS players must also be brought into the discussion. For example, Oxigen has a product called Super POS which also doubles as a mini ATM and has biometric and Aadhaar authentication. The RBI recently issued a notification which instructed banks to upgrade ATMs and POS machines to accept Aadhaar. Banks should figure out a way to work with non-bank entities to push for a cash less environment.

Perhaps, banks can employ third party players as banking correspondents in rural areas and get give a cut from the MDR to them.

What about QR codes

Paytm has an interesting approach to offline merchants. Recently the company announced that it has more than a half a million offline merchants. Paytm’s offline merchants have a QR code which a customer has to scan on the app to make a payment. Effectively, it has turned the POS system on its head by cutting the costs of installing and maintaining a POS terminal.

Once a customer decides to move his/her money to a bank account, they need to pay a fee of 1% to Paytm which is considerably lesser than the MDR charged by banks. I spoke to a mom-and-pop shop owner in the neighbourhood who said that this was a lot more cheaper than the costs associated with cards. He explained that he wants acceptance of Paytm to increase so that savings on transactions will be reduced.

To sum up

There are a number of factors which are inhibiting the growth of POS terminals in India:

– Allowing only banks to lead the way on POS.
– The bank interchange fee (MDR) for merchants is too high.
– The cost of handling and maintaining machines are an added cost for merchants.
– The split of MDR disproportionately favours the banks issuing cards. There needs to be a more equitable distribution of the fee between the issuing bank and the accepting bank.

 

From Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma

Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma

Shashidhar KJ September 26, 2016

We’ve been seeing Paytm stickers coming in offline stores all over, at least in Delhi, Mumbai and Bangalore. In the month of August, Paytm’s offline merchant transactions exceeded online transactions on the platform, CEO Vijay Shekhar Sharma (VSS) told MediaNama, and a large part of this has been owing to a change in technology approach by the company. The company claims over half a million offline merchants now. Edited excerpts from MediaNama’s interview with VSS:

Took a call to focus on offline in 2016: “Every year we pick up a theme. When we first started, it was online recharges, the second year was online payment. Now, this year when we started we thought we would take up offline as a plan that we would have Paytm in every nook and corner (of the country). We thought that after Paytm, there should not be any pain-point left for anyone else to solve.

Online is great, online is nice and but this is where the bus is moving. But ultimately there is a larger customer base and transaction base which happens in the offline world. It was a very, I would say, uncanny for an online company to think of offline.

So we built our own software where we can track offline signups, sales-force automation and a lot things, so that we are disciplined. And I think we have more than half a million merchants signed up.

Update: VSS has clarified that the company refers to a transaction as “offline” when the merchant doesn’t have their own application, and is integrated only using the QR code, and not via the API. Thus, these will not include transactions made on the Uber app.

Dumb card, smart POS; smart phone and dumb POS: “I mean if you look at it, first of all, our understanding is that we have a different process versus other offline payment methods. Offline right now is dominated by Visa and MasterCard. American Express is also very small.

But the consumer has a dumb device called card, and what merchants carry is a smart device called POS with Internet connection. So, we are changing that structure. We are saying that merchant will not have a smart device or Internet connection, and consumer will have that. So payment happens via a QR code and the processing happens on the consumer side.

NFC versus QR code: “I think we saw it first in China, where QR codes dominate massively, and we had discussions with our friends in China (Alibaba) on why they chose to have QR code. I have personally have been a total non-believer of QR code in advertising, but when it came to payments it became important because the consumer and merchant have to communicate in a non technical way,and some way for the data to be given from consumer to merchant easily.

Whether you look at NFC, there is an investment that the merchant has to do. And if you use the smartphone as a consumer device the cost structure works in reverse in our case. The idea that we had is that every smartphone, technically, might not have NFC. But every smartphone does have a scanner.

So on the Paytm app, when you click on pay, the QR code scanner comes up.

Challenges in going offline: “So, it was three layers of new things. One for the consumer, it was new because they have never gone in the offline world and paid in any online payment instrument. We had to help with consumer mindset. Second is towards the merchant who are okay with cash and have no obligation to build a non-cash business. The third was that we had chosen a new technology, where the consumer and the merchant had to learn. But the thing that we found out was, in the end, it was so fast that I don’t think OTP or NFC or any other thing like MMID will work.

The point is that this is tokenization for your digital wallet.”

Sector choices for offline rollout: We started with the transportation vertical – autorickshaw, taxi, Uber, parking or petrol pump – where there is a lot of sale. Second place where we found the spends were in the groceries, fruits and vegetables etc and the third category was discretionary spends which was like shopping, quick service restaurants and restaurants. So we created three beats for these.

Our approach was that Delhi is the first city where you have to find the correct solution. Because in verticals like in parking, there would be Internet connectivity problems, while in QSR, payments need to happen very fast, and OTP would be very slow.

So we built the beta run in one city and then went to multiple cities. There is a team which builds solutions, and there is a second team which takes it to the market.

The teams which go to market look at top cities, mid-tier cities and long tail cities. We found it very surprising that in long tail cities, it increases sales for a merchant when they say that they accept Paytm.

There is also a number where you can dial and say that you want Paytm, and through this tens of thousands of merchants have been signed up. Consumers and merchants reach out to us just because somebody else has used it. Then there is a front-tail where we go to the shop, and we explain to them what the product is where they do merchant on-boarding, verification and give them QR codes. So two different processes, but both require the merchant to be on-boarded with full verification and documentation.

Merchant transaction charges: In our case, the merchant pays 0%. So consumers will load money through credit cards and debit cards and pay to the merchant. So effectively, the merchant is effectively receiving credit and debit card payments at 0%. We make money which comes through the wallet, which is used on the Paytm network.

Another interesting thing is the money these merchants receive goes back to the network to be used and only 5% is sent back to the bank account.

(Editor’s note: Paytm charges charges 4% for wallet-to-bank account transfers for customers who have not completed their KYC and 1% for KYC compliant customers. That still is effectively lesser than card companies who effectively charge around 2.5% on transactions)

Paytm by the numbers

Paytm wallet users: 140 million
Monthly transactions: 75-90 million (as per media sources)
GMV (current): $5 billion
GMV projected by financial year end: $10 billion
Offline merchants: 500,000
Monthly offline transactions: 10 million per month
Employees: 4,500
Payments bank launch: Diwali 2016
Investors: Ant Financials (AliPay), Alibaba Group, SAIF Partners, Sapphire Venture and Silicon Valley Bank

Online vs offline growth: Our online was a bit like iOS growth. One successful merchant gave us another one. While with offline, it was more like Android growth: it just grew very fast. In the month of July, we just had it at the same level between offline and online. And in August offline overtook online. Basically now, Paytm does more offline merchant transactions than online.

Recharge now constitutes less than 20% of our business. That number is very small now because we have created so many uses cases. One thing we found out was, when you give your payment system to a merchant, the merchant’s experience becomes a part of the total experience. Consumer might prefer to pay through an instrument, but the process to reach the merchant payment instrument is so difficult, that the consumer might give up before that. We found out that the payment system should be there on the merchant’s side.

Concentration of cities & Ticket sizes: “Right now we are there in about 900 cities and towns. When we look at our payment consumer, where the median is bigger, as expected, it is coming from cities where the Internet connectivity is there. So top 10 cities will be constitute about 50%. Online transactions go through ecommerce merchants and have a larger ticket size. But if you look at offline transactions, payments in offline usage of wallet, there is a smaller order value.

 

From RBI concept paper looks to boost card payments at POS terminals

RBI concept paper looks to boost card payments at POS terminals

Shashidhar KJ March 11, 2016

The Reserve Bank of India came out with a concept paper earlier this week for improving the card acceptance infrastructure and is seeking comments, suggestions and views from relevant players on the same.

“The “economics” of card payments plays an important role in ensuring greater and wider participation of all stakeholders involved in the card payments value chain and, as such, any strategy geared towards expansion of the infrastructure in a “managed” way has to also address these issues,” the RBI said.

Accordingly, the RBI has outlined a broad strategy to enhance the growth in acceptance infrastructure through POS terminals and usage of cards which includes further rationalisation of merchant fees for debit card transactions. Here are some of the take aways from the paper:

Card payments in India

– The RBI noted that growth in electronic payments is not uniform across all segments nor is it visible at all locations across the country. Particularly, in the context of cards, while the card base is increasing rapidly, activation or usage rates are quite low, especially for purchase of goods and services. Card usage at ATMs, on the other hand, is quite high.

– Debit cards registered a growth of 64% between Oct 2013 and Oct 2015 while credit cards grew at 23% during the same period. As at end-December 2015, the total number of credit cards stood at 22.74 million while debit cards stood at 636.85 million cards in the country.
– Between Oct 2013 and Oct 2015, ATMs increased by around 43% while POS machines increased by around 28%. As of end-December 2015, the number of ATMs has increased to 193,580 while POS machines had increased to 1,245,447 in the country.
– From April 2015 to December 2015, the usage of debit cards at ATMs continues to account for around 88% of the total volume and around 94% of total value of debit card transactions. Usage of debit cards at POS machines accounts for only around 12% of total volume and 6% of total value of debit card transactions.
– From April 2015 to December 2015, credit card usage at ATMs accounted for around 0.73% of volume and 1.25% of value of total credit card transactions. Use of credit cards for POS transactions accounted for 99.27% of volume and 98.75% of value of total credit card transactions in the country.
– While almost every bank is a card issuer, very few banks are engaged in the activity of merchant acquiring and setting up of card acceptance infrastructure. Thus, there is concentration in acquiring business with the top 5 acquirer banks accounting for nearly 81% of the POS infrastructure and top 10 acquirers’ share of POS being above 90%.

– The number of merchant establishments accepting card payments has increased from 0.85 million merchant establishments in Oct 2013 to around 1.15 million establishments in Oct 2015, a growth rate of 34%. As on Dec 2015, the number of such merchant establishments was 1.26 million.

Factors inhibiting growth for card acceptance

– High cost of acquiring business that include high capital cost of POS machine, recurring maintenance, difficulty of servicing POS machines in rural areas.

– Low utilization of cards makes acceptance for small merchants and in rural areas unviable due to low card footfalls and low transaction values besides other costs associated with merchant acquiring, ultimately forcing acquiring banks to withdraw the POS terminal.

– Lack of adequate and low cost telecommunication infrastructure

– Lack of incentive for merchants to accept card payments is another inhibiting factor. Further, transparency and audit trails associated with card payments often act as deterrent for accepting card payments by merchants.

– Insufficient awareness about the costs associated with use of cash apprehension of using non-cash payments, especially concerning its safety and security, anonymity associated with cash payments, surcharge and convenience fees being levied for use of card and electronic payments, difficulties in changing consumer behavior, etc. also inhibit growth / usage of card of payments for purchase of goods and services.

– Merchant Discount Rate (MDR) also often acts as a disincentive.
Strategies for enhancing acceptance

Mandate installations of POS terminals in proportion to cards issued: The RBI said that banks issuing cards should install proportionate number of POS terminals to the number of cards issued. However, it noted that not every bank is equipped to run merchant acquisition business. The lack of expertise may lead to some banks entering this business through outsourcing model which later might prove costly.

Setting up of Acceptance Development Fund (ADFs): The RBI also mooted for setting up an ADF where different stakeholders in the card payment chain come together to set up a program to encourage wider deployment of card acceptance infrastructure. These are generally funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund which is then invested in structured initiatives to expand acceptance infrastructure.

ADFs are usually managed by third parties who establish the framework for use of funds which include subsidies for installation of terminals, development of new technologies / segments / geographies, marketing and education to increase awareness for acceptance as well as for usage.

Rationalisation of Merchant Discount Rate

The major source of revenue in the card business is the Merchant Discount Rate (MDR) or Merchant Service Fee. MDR comprises other cost segments such as the interchange fee (fee paid by acquirer to card issuing bank), processing and other fees payable to the card network, and other costs incurred by the acquirer along with acquirer’s margin. The RBI has proposed a number of options for the rationalization of the MDR some of them are:

Uniform MDR across all merchant categories & locations proportionate to transactions size: RBI had fixed a cap on MDR for debit card usage as

  • not exceeding 0.75% of the transaction amount for value upto Rs. 2000/-
  • not exceeding 1% for transaction amount for value above Rs. 2000/-

This is basically maintaining status quo for the regulatory structure. However, the growth in deployment of POS terminals has come down as lower MDR was cited as on of the reasons making the business unviable.

Differentiated MDR at select merchant categories at all locations: Another approach is to have a differentiated MDR framework for some select merchant categories across all locations. For example, some merchant categories could include utility bill payments (electricity, water, gas, telephone), municipal taxes, primary hospitals and health centres, primary educational institutions, public distribution system outlets ( like ration shops), fertilizers, seeds and similar agricultural products, public transport, etc.

Differentiated MDR at select merchant categories in Tier III to VI locations: An another alternative is to rationalise MDR in select categories in Tier III to VI locations with the objective of ensuring wider deployment of POS terminals.

 

From Update: Card payments on POS terminals suffered outages and failures over the weekend

Update: Card payments on POS terminals suffered outages and failures over the weekend

Shashidhar KJNovember 14, 2016

Update: MediaNama spoke to Manish Patel, CEO of POS machine company Mswipe who spoke told us that card networks are unable to deal with the sudden surge in payments on their networks. He added that on Saturday between 7 pm to 9.30, pm Visa’s servers failed but POS machines were still able to process payments from MasterCard.

MediaNama was unable to independently verify this but we have written to Visa and will update once we hear from them.

Meanwhile, Mswipe said that it saw a huge surge in the number of transactions it processed. Typically, Mswipe processes 45,000-50,000 transactions a day. On Friday, this number went up to 1 lakh transactions and to 1.25 lakh transaction on Saturday. On Sunday, Patel added the number of transactions went above their capacity to process them and that they are currently adding more capacity.

Earlier: POS terminals across the country suffered outages for several hours over the weekend and many card transactions were declined according to multiple people who spoke with MediaNama. For example, card transactions at a restaurant in Mumbai’s Mulund West was down from 7 pm to 10 pm on Friday, and there was a similar outage the next day. The restaurant owner told MediaNama that he had contacted ICICI Bank about the outages, and they attributed it to the demonetization drive, saying they needed some more time to recalibrate. Many stores in the neighbourhood also could not process card payments, and insisted that customers pay by cash. MediaNama’s Salman SH and Sneha Johari reported similar outages in Bangalore and Pune.

Also read: MediaNama’s Demonetization Liveblog, with the latest updates.

In Bangalore, a pubs POS terminals were down on Saturday morning. The pubs owner also said that he had to to accept bank transfers from customers to his account. The owner added that all six POS terminals were down due to increased volumes on card payment networks. The POS machines displayed an error code “server down”.

On Sunday, Damodar Mall, CEO of Reliance Retail tweeted about card payments getting declined and appealed to ICICI Bank and HDFC Bank for help.

We have written to ICICI Bank, HDFC Bank and Axis Bank for comments regarding the outages. Meanwhile, State Bank of India (SBI) tweeted that it processed 10.05 lakh POS transactions on Sunday. To give context, SBI processed 3,25,00,690 debit card transaction over POS terminals in July, according to RBI data.
Meanwhile Rahul Kotari, business head of PayUbiz, told MediaNama that the payment gateway has seen a spike in the number of transactions from around 750,000 a day to 1.5 million a day following the demonetization. Note that PayU also has a POS machine for offline transactions and process them through its payment gateway. He added that the payment gateway is built to handle five times its current load and is increasing it to 10 times anticipating a surge in online transactions. Kothari added that the company is considering deploying QR codes in the short term for offline merchants to help ease the pain of doing business.

Asymmetry in POS terminals

As we have pointed out many times, India has the dubious honour of having one of the lowest POS terminal penetration, according to a 2015 Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.

The Reserve Bank of India’s data shows that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country.

A closer look at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.

 

From Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments

Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments

Paytm has just created millions of Point of Sales (PoS) across the nation, with one strategic move. Now, anyone with a merchant account with Paytm can receive payments via debit card/ credit card, which means that digital payments have been super-simplified and scaled beyond imagination.

This is certainly one of the masterstrokes by Paytm for encouraging even more digital transactions and a good move towards an absolute cashless economy.

Paytm founder Vijay Shekhar Sharma said, “India needs a very innovating mobile pos machine and Paytm has already been accepted by many merchants. By extending our merchant network to all other payment networks, we are enabling digital payments to a very large number of Indians.”

How Will It Work?

Suppose you visit a local grocery shop to purchase few items and the shop-keeper has a Paytm account. Now, there can be two scenarios: Either you also have a Paytm account, which means that you can simply transfer the amount. Or, you don’t have a Paytm account, but have debit/credit card to make the payment.

In this case, the merchant can accept your debit/credit card via his Paytm app, and complete the payment.

This is how it will work:
Step 1: The merchant raises the bill, and gives you his phone wherein you enter your debit/credit card number

Step 2: The customer receives an OTP on his mobile number

Step 3: Enter the OTP inside merchant’s Paytm app

Step 4: Payment complete

Till December 31, there would be no fees for such card based transactions on merchant’s Paytm app. The new version of the app has been updated, and under ‘Accept Payment’ tab, merchants can receive payments from cards issued by Rupay, Visa, MasterCard and Maestro.

Big Boost For Cashless Economy

There are around 150 million users of Paytm, and almost 1.5 million merchants registered with the. With one single step, these 1.5 million merchants can now accept debit and credit based payments, thereby transforming into a live PoS, instantly.

Besides, RBI has recently increased the limit for merchants to Rs 50,000 per month, which means that they can send upto Rs 50,000 from Paytm app to the bank, without KYC. This, along with PoS transformation means that merchants would now prefer Paytm mode of accepting payments (both from credit/debit card or peer-to-peer money transfer).

Merchants can register with Paytm by visiting here.

Paytm is expecting atleast 10-15 million more merchant accounts after this decision to convert apps into PoS. We will keep you updated as more details come in.

 

 

Debit and Credit Card Networks

  • Visa
  • Mastercard
  • American Express
  • Discover
  • Diners Club
  • RuPay

Government of India Networks

  • IMPS (Immediate Payment Service)
  • NEFT (National Electronic Funds Transfer) -Online Banking Transfer
  • NFS (National Financial Switch) – ATM (Automatic Teller Machines) Network
  • SBI Chhota (little) ATM (using POS devices for Cash)
  • RTGS (Real Time Gross Settlement System) – Large Value Real Time Network
  • UPI (Unified Payment Interface) -using BHIM app
  • NACH (National Automated Clearing House)
  • AEPS (Aadhaar enabled Payment System) -MicroATM
  • BBPS (Bharat Bill Payment System) – for paying Utilities Bills
  • RUPAY – Credit and Debit card network
  • *99# (uses USSD channel)
  • *99*99# (Uses USSD channel)

 

NFS in India 

National Financial Switch (NFS) is the largest network of shared automated teller machines (ATMs) in India.[1] It was designed, developed and deployed by the Institute for Development and Research in Banking Technology (IDRBT) in 2004, with the goal of inter-connecting the ATMs in the country and facilitating convenience bank- ing. It is run by the National Payments Corporation of India (NPCI).

 

AEPS from NPCI website

In order to further speed track Financial Inclusion in the country, Two Working Group were constituted by RBI on MicroATM standards and Central Infrastructure & Connectivity for Aadhaar based financial inclusion transactions with members representing RBI, Unique Identification Authority of India, NPCI, Institute for Development and Research in Banking Technology and some special invitees representing banks and research institutions.

The working group on MicroATM standards & Central Infrastructure & Connectivity has submitted its report to RBI. As a part of the working group it was proposed to conduct a Lab level Proof of concept (PoC), integrating the authentication & encryption standards of UIDAI, to test the efficacy of MicroATM standards and transactions using Aadhaar before they are put to actual use. The PoC was successfully demonstrated at various venues.

AEPS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business correspondent of any bank using the Aadhaar authentication.

The four Aadhaar enabled basic types of banking transactions are as follows:-

  • Balance Enquiry
  • Cash Withdrawal
  • Cash Deposit
  • Aadhaar to Aadhaar Funds Transfer

The only inputs required for a customer to do a transaction under this scenario are:-

IIN (Identifying the Bank to which the customer is associated)
Aadhaar Number
Fingerprint captured during their enrollment

 

From RUPAY from NPCI website

The National Payments Corporation of India (NPCI) is a pioneer organization in the field of retail payments in India. It is a body promoted by RBI and has presently ten core promoter banks (State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC). It has been incorporated as a Section 25 company under Companies Act and is aimed to operate for the benefit of all the member banks and their customers.

The vision of NPCI being able to provide citizens of our country anytime, anywhere payment services which are simple, easy to use, safe, and secure, fast and also cost effective. NPCI aims to operate for the benefit of all the member banks and the common man at large.

Reserve Bank of India, after setting up of the Board for Payment and Settlement Systems in 2005 released a vision document incorporating a proposal to set up an umbrella institution for all the Retail Payment Systems in the country. The core objective was to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. This led to the formation of National Payments Corporation of India, (NPCI).
RuPay, a new card payment scheme launched by the National Payments Corporation of India (NPCI), has been conceived to fulfill RBI’s vision to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments.

“RuPay”, the word itself has a sense of nationality in it. “RuPay” is the coinage of two terms Rupee and Payment. The RuPay Visual Identity is a modern and dynamic unit. The orange and green arrows indicate a nation on the move and a service that matches its pace. The color blue stands for the feeling of tranquility which is the people must get while owning a card of the brand ‘RuPay’. The bold and unique typeface grants solidity to the whole unit and symbolizes a stable entity.

 

From ICICI Bank Website

The IMPS (Immediate Payment Service)

from ICICI Bank helps you access your bank account and transfer funds instantly and securely. You can send money using ICICI Netbanking on an internet-powered laptop or PC. We enable you to transfer funds from your ICICI account to any ICICI or non-ICICI account. The beneficiary account is credited immediately when a fund transfer request is made from your side.

This service is available 24×7, throughout the year including Sundays and any bank holiday.

Use IMPS service to transfer funds anytime, from anywhere using: Netbanking, Imobile, and M.DOT

What is RTGS ?

The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds individually on an order by order basis (without netting). ‘Real Time’ means the processing of instructions at the time they are received rather than at some later time.’Gross Settlement’ means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.

What is NEFT?

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals can electronically transfer funds from any bank branch to any individual having an account with any other bank branch in the country participating in the Scheme.

Use NEFT service to transfer funds anywhere using the following modes:

  • Internet Banking
  • iMobile
  • m.dot
  • Pockets
  • icicibankpay

Unified Payment Interface  (UPI) is here

Discover a quick and easy way to send and receive money using a Virtual Payment Address (VPA) without entering additional bank information.

 

From Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM

Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM

Vivek Pai October 6, 2014
Ezetap SBIBangalore-based point of sale (PoS) startup Ezetap has partnered with the State Bank of India to launch ‘Chota ATM’, a solution that can double as an ATM device as well as a PoS terminal that can accept payments from any debit and credit card.

Targeted at neighborhood Kirana shops, the solution will be offered to merchants for a non-refundable deposit of Rs 499 along with a monthly fee of Rs 150 and a commission of Rs 5 per cash-back transaction.

Sanjay Swamy, Managing partner of AngelPrime (which incubated Ezetap) writes that merchants can sign up for this service by opening a zero balance current account with SBI and use this solution over an Android or Windows phone or tablet with an active data connection.

It’s worth noting that SBI had earlier selected Ezetap to deploy 500,000 PoS terminals in the next 5 years for the customers of SBI and its five associate banks.

Cash Withdrawal limits & commission

Ezetap Chota ATM
Through this solution, credit and debit card holders can swipe their card to carry out three types of transactions – Sale, Sale + Cash withdrawal and Cash withdrawal only.

As per SBI’s Chhota ATM FAQs (pdf), cash can be withdrawn in multiples of Rs 100. There is a minimum daily withdrawal limit of Rs 100 per card holder and a maximum daily limit of Rs 1,000 per card holder, in line with the RBI guidelines.

There is also an additional 1% charge on customers having State Bank group debit cards to a minimum of Rs.7.50 and maximum of Rs 10 per transaction. For other bank holders, this charge will be decided by their respective banks. As for merchants, they will receive a commission of Rs 5 per cash withdrawal transaction.

Other developments

In January last year, Ezetap had partnered with Citibank to launch a mobile payment solution for merchants targeting credit and debit card holders in India. As part of the partnership, merchants were expected to receive real time information during the payment and collection process, when customers transact using Ezetap. Citibank had then claimed to have partnered with companies like Shoppers Stop, Bajaj Allianz, Flipkart, BookMyShow and Vodafone to deploy this solution for payment and collection.

The company had also launched a debit card supporting mobile PoS solution in July last year and had acquired Hyderabad-based loyalty platform Clinknow in June this year to launch an integrated payments and loyalty solution for merchants across India.

Ezetap has raised around three rounds of investments until now – a strategic undisclosed investment from American Express in March this year, a $8 million investment in Series B funding led by Helion Advisors with participation from existing investors Chamath Palihapitiya’s The Social+Capital Partnership and Berggruen Holdings in February this year and $3.5 million in series A funding from Peter Thiel, Chamath Palihapitiya, Nicolas Berggruen and David Sacks in November 2011.

(With Inputs from Vikas SN)

 

India POS Devices

All three major POS devices providers in USA have business offices in India.  Their business has boomed since demonitization was announced in November 2016.  But there is shortage of these devices in India.  On Feb 1, 2017, Government slashed import duties on POS devices.  But procurement times are several months long.  Devices are manufactured in China.

  • VeriFone
  • FirstData
  • Ingenico

There are other manufacturers in Asia who provide POS devices.

  • PAX Technology (China)
  • SZZT Electronics (China)
  • Fujian Newland (China)
  • CyberNet (South Korea)
  • Bitel (South Korea)
  • Shenzhen Xinguodu (China)
  • Castles Technology (Taiwan)
  • New POS Technology (China)

 

There are other devices which are required for a complete solution.  There are:

  • POS Terminal (CPU)
  • Barcode Scanners
  • Data Collection Devices
  • Handheld Devices
  • Mobile Computer
  • Receipt Printers
  • Bar Code Printers
  • Cash Drawers
  • Monitors
  • Check Readers
  • Keyboards
  • Touch Screens
  • Biometrics
  • Signature Capture Device
  • Payment Terminals

 

India m-POS Devices

EZEPAY has linked with State Bank of India to bring Micro ATM solution to get cash from POS devices.  In USA, this service is known as Get Cashback option in all POS devices at the merchants.  Another Mini ATM solution is from Oxigen known as OxiShaan. SBI has tied with Oxigen to provide miniATM solution known as MobiCash. Oxigen has a business correspondent relationship with SBI.

  • mSwipe Wisepad
  • Ezetap
  • MRL Posnet PayTivo
  • Mosambee
  • Paymate India PayPos
  • Ikaaz
  • Mobi Swipe (Ingenico)
  • EasyPos
  • Essae (hardware)
  • PayUMoney Pos
  • Oxigen OxiShaan
  • MTS mPos
  • Paynear One
  • CirQ Pos
  • ePaisa
  • BijliPay
  • HDFC PayZapp
  • Pine Labs
  • SBI MAB Pos
  • ICICI MBS MPos
  • Union Bank of India POS
  • Axis Bank
  • Ezee Pay

 

 

China Networks

PBOC and Union Pay control following networks:

  • nationwide inter-bank system  (the existing EIS will be replaced by the next-generation CNAPS)
  • regional (cities and counties) payment systems (LCHS)
  • commercial banks’ intra-bank payment systems.
  • Internet Banking Payment System (IBPS)
  • Interbank Bankcard Transaction Clearing System (IBTCS) – Union Pay

 

From Chapter 2: Payment Systems of China

The China National Advanced Payment System (CNAPS) is composed of the High-Value Payment System (HVPS), the Bulk-Entry Payment System (BEPS), and the Settlement Account Processing System (SAPS).

HVPS is an RTGS that performs real-time processing of large-value funds on a gross amount basis, and has the same functions as Bank of Japan’s financial network system (BOJ-NET).

BEPS is for small-value funds, with daily netting night batch processing, and has the same function as Data Telecommunication System of All Banks in Japan.

SAPS is the system for common operations related to settlement accounts, including receipt and payment of money, settlement of LCHS, and management of overdraft limits. Although such a SAPS function makes up a part of the entire payment system in many other countries, CNAPS uses each of them independently.

Local Clearing House System

The Local Clearing House System (LCHS) is for local payments related to exchange, bill, and check transactions within the same region (cities and counties). There are approximately 2,300 clearing houses throughout the country, and although most LCHS sites are owned and managed by PBC, some are jointly owned by participants. All receipts and payments of funds on a written basis are cleared and settled via LCHS.

Commercial Banks’ Intra-office Payment Systems

China’s four largest banks have the most extensive centralization and integration hardware and software, on which each spends RMB1–3 billion annually, in their efforts to consolidate computer service centers and improve nationwide networks. If a credit remittance is performed within the same bank, it can process the transaction within approximately 24 hours. Although these banks can carry out payments within two or three hours, based on priority-processing agreements for such transactions as urgent large-amount securities settlements, the determination of priority order still often requires manual processing. Large private banks—such as Minsheng Bank of China and Shanghai Pudong Development Bank—have focused on systems investment, made efforts to centralize data on customers who are subject to international standards, and have focused on Internet banking services to make up for a lack of branches. Most banks’ customer account databases are still dispersed, and real-time processing is not possible. Databases should be combined in host centers.

National Interbank System

The National Interbank System (NIS) conducts manual inter-bank payments between distant places. After a payment instruction, either cabled or written, is sent by a sending bank directly to a receiving bank, daily netting is performed for funds payment and the final balance of payment. At each stage, notification of payments between correspondent banks are cabled and completed between PBC branches. After all crediting data are sent to NIS’s computer center and inspected there, checking sheets are sent to the sending and receiving banks. NIS’s status has decreased.

 

Non Bank Payment Networks

  • Alipay
  • Tencent Tenpay
  • Baidu

 

 

 

Key Sources of Research:

 

A Guide to Debit and ATM Card Industry

Fumiko Hayashi Richard Sullivan Stuart E. Weiner

Federal Reserve of Kansas City

2003

https://www.kansascityfed.org/PUBLICAT/PSR/BksJournArticles/ATMpaper.pdf

 

Mobile Payments in the United States at Retail Point of Sale: Current Market and Future Prospects

Marianne Crowe, Marc Rysman, and Joanna Stavins

Public Policy Discussion Papers.

Federal Reserve Bank of Boston 10:2 (2010)

 

 

Competing Technologies for Payments: ATMs, POS Terminals and the Demand for Currency

Santiago Carbó-Valverde

Francisco Rodríguez-Fernández

 

 

Point of Sale (POS) Systems and Security

 

https://www.sans.org/reading-room/whitepapers/bestprac/point-sale-pos-systems-security-35357

 

 

NON-BANKS AND RETAIL PAYMENTS: INNOVATIONS IN CHINA AND THE UNITED STATES

BY NICHOLAS BORST

Federal Reserve SF

2015

 

 

MSwipe

http://www.mswipe.com

 

 

Best Retail POS Software | Point Of Sale Software in 2017

https://www.softwaresuggest.com/point-of-sale-pos-software

 

 

SaralPos

http://www.saralpos.com

 

 

Epaisa

http://us.epaisa.com

 

 

EasyPos

http://www.easypos.in

 

 

Cards, ATMs, POS will be redundant by 2020 in India, says Niti Aayog CEO

http://indiatoday.intoday.in/story/cards-atms-pos-niti-aayog-redundant-2020-india-amitabh-kant/1/852018.html

 

 

Essae

http://www.essae.com/pos-system

 

 

DucePos

http://www.ducepos.com

 

 

‘India needs 20 m point of sale terminals’

http://www.thehindu.com/business/Industry/india-needs-20-m-point-of-sale-terminals/article8018793.ece

 

 

Innovative payment systems for financial inclusion

EY

http://www.ey.com/in/en/newsroom/news-releases/ey-press-release-innovative-payment-systems-for-financial-inclusion

 

 

Concept Paper on Card Acceptance Infrastructure

RBI

 

https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/MDRDBEDA36AB77C4C81A3951C4679DAE68F.PDF

 

 

RBI concept paper looks to boost card payments at POS terminals

http://www.medianama.com/2016/03/223-rbi-concept-paper-looks-to-boost-card-payments-at-pos-terminals-in-the-country/

 

 

Update: Card payments on POS terminals suffered outages and failures over the weekend

By Shashidhar KJ ( @KJshashi )

on November 14, 2016

http://www.medianama.com/2016/11/223-pos-terminals-demonetization/

 

 

Why it is difficult to scale POS machines in India

By Shashidhar KJ ( @KJshashi )

on October 19, 2016

http://www.medianama.com/2016/10/223-pos-editorial-scaling-india/

 

 

Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma

By Shashidhar KJ ( @KJshashi )

on September 26, 2016

http://www.medianama.com/2016/09/223-paytm-offline-merchants-vss/

 

 

Veriphone

https://www.verifone.com

 

 

Ingenico

https://payment-services.ingenico.com/in/en/online-payment-services-solutions/multi-channel/point-of-sales-payment-terminals

 

 

Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments

http://trak.in/tags/business/2016/11/23/paytm-million-pos-card-based-payments/

 

 

SBI’s ‘Chota ATM’ Costing $8 Coming To Every Nook & Corner Of India

http://trak.in/tags/business/2014/10/07/sbi-chota-atm-ezetap/

 

 

Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM

By Vivek Pai on October 6, 2014

http://www.medianama.com/2014/10/223-ezetap-sbi-chota-atm/

 

 

CASH@POS by State Bank of India (SBI)

http://sahajcorporate.com/pdf/SBI%20Cash@POS.pdf

 

 

Oxigen Launches Mini ATM & Mobile PoS Device OxiShaan

By Apurva Chaudhary

on September 14, 2012

http://www.medianama.com/2012/09/223-oxigen-launches-mini-atm-mobile-pos-device-oxishaan/

 

 

Introduction of Chhota ATM: Evolution of the Financial Inclusion Programme

http://thestoryjunction.com/introduction-chhota-atm-evolution-financial-inclusion-programme/

 

 

National Financial Switch

NPCI

https://en.wikipedia.org/wiki/National_Financial_Switch

 

 

VARIOUS MODES OF ELECTRONIC FUND TRANSFERS

http://www.itsallaboutmoney.com/convenience-banking/internet-banking/various-modes-of-electronic-fundstransfers-in-india-neft-rtgs-and-imps/Structure

 

 

List of mPOS Machine & Solution Providers in India – How to buy one?

http://www.iamwire.com/2016/12/mpos-india-machine-solution-providers/146049

 

 

Indian Payments Industry: Mobile POS Solutions

 

http://www.indigoedge.com/IE%20Insight%20-%20India%20Payments%20-%20Mobile%20POS%20Solutions.pdf

 

 

More Info on POS Hardware options – A USA based company

http://www.datamaxsys.com

 

 

Risk Management and Nonbank Participation in the U.S. Retail Payments System

By Richard J. Sullivan

 

https://www.kansascityfed.org/publicat/econrev/PDF/2q07sull.pdf

 

 

Non-banks in retail payments

September 2014

http://www.bis.org/cpmi/publ/d118.pdf

 

 

Payment, clearing and settlement systems in the United States

http://www.bis.org/cpmi/publ/d105_us.pdf

 

 

Payment, clearing and settlement systems in China

http://www.bis.org/cpmi/publ/d105_cn.pdf

 

 

Chapter 2: Payment Systems of China

 

http://euro.ecom.cmu.edu/resources/elibrary/epay/PaymentSystemsOfChina.pdf

 

 

Development of Retail Payment Services in China

CHEN Xue

 

http://siteresources.worldbank.org/EXTPAYMENTREMMITTANCE/Resources/Xue_Day2_final.pdf

 

 

 

Payment, clearing and settlement systems in India

https://www.bis.org/cpmi/publ/d97_in.pdf

 

 

Payment Systems in India: Opportunities and Challenges

DEEPANKAR ROY

 

http://www.icommercecentral.com/open-access/payment-systems-in-india-opportunities-and-challenges.pdf

 

 

Assessment of the Payment System

With respect to Inclusiveness towards Small Remittances

 

http://www.math.iitb.ac.in/~ashish/workshop/Assessment%20of%20the%20Payment%20Systems_2011.pdf

 

Economics of Trade Finance

Economics of Trade Finance

 

Matrix of trade finance instruments

  • Raising working capital for exports: Debt financing; Asset-based financing; Export factoring; and Leasing
  • Facilitating payments: Cash-in-advance; Letter of Credit(L/C); Documentary collection; and Open accounts
  • Mitigating risks: Export credit guarantee; Export credit insurance; Forfeiting; and Hedging.

 

Trade Finance is the lubricant in Global Trade.  The concentration of banks providing Trade Finance is very high.  So are the risks if a bank fails or withdraws credit due to regulations.

Questions:

  • How many Banks provide Trade Finance?
  • What happens when Banks withdraw credit due to Financial Crisis?
  • What other alternatives are there for Trade Finance ?  GTLP?
  • What is the role of increased regulations on Trade Finance? BASEL III

 

From Trade finance around the world

tradefin2tradefin3

 

Decline in Trade Finance as a cause of Global Trade Collapse

  • Concentration of Banks providing Trade Finance
  • De-risking by EU Banks to EMEs due to BASEL III requirement
  • Backlash against Trade

 

From DE-RISKING BY BANKS IN EMERGING MARKETS – EFFECTS AND RESPONSES FOR TRADE / IFC EMCOMPASS

Emerging evidence suggests that de-risking is a reality. Increased capital requirements, coupled with rising Know-Your-Customer, Anti-Money-Laundering, and Combating-the-Financing-of-Terrorism compliance costs have resulted in the exit of several global banks from cross-border relationships with many emerging market clients and markets, particularly in the correspondent banking business. A subset of this business, trade finance, is also at risk, with potential consequences for segments of emerging market trade. The emerging market trade finance gap was significant before the crisis and has since likely expanded. Those involved in addressing the de-risking challenge must focus on compliance consistency and effective adaptation of technological innovations.

 

From ADB 2016 Trade Finance Gaps, Growth, and Jobs Survey

  • The estimated global trade finance gap is $1.6 trillion.
  • $692 billion of the gap is in developing Asia (including India and the People’s Republic of China).
  • 56% of SME trade finance proposals are rejected, while large corporates face rejection rates of 34% and multinational corporations are rejected only 10% of the time.
  • Firms report that 25% more trade finance would enable them to hire 20% more people.
  • Woman-owned firms face higher than average rejection rates.
  • 70% of surveyed firms are unfamiliar with digital finance, uptake rates highest in peer-to-peer lending.

 

From ADDRESSING THE GLOBAL SHORTAGE OF TRADE FINANCE

The International Chamber of Commerce (ICC) 2016 Global Survey on Trade Finance reveals that 61 percent of respondents cited a global shortage of trade finance—a figure that is particularly concerning as we continue to observe a period of prolonged sluggishness when it comes to global trade growth. But hope is not lost. Doina Buruiana, Project Manager at ICC Banking Commission, explains the various ways that the trade-finance gap can be filled.

For the fifth consecutive year, trade growth has been reported at below 3 percent and has not recovered to pre-crisis levels—with a global trade-finance shortage estimated to have reached US$1.6 trillion in 2016, according to the Asian Development Bank (ADB). Such figures certainly make for grim reading. And what’s more, the findings from the International Chamber of Commerce’s (ICC) 2016 Global Survey on Trade Finance—an annual report reflecting the issues and trends on the trade-finance landscape—are also providing cause for concern. Sixty-one percent of respondents—national, regional and global banks providing trade finance—reported a global shortage of trade finance.

There are various reasons for this. Ninety percent cited the cost or complexity of compliance requirements relating to anti-money laundering (AML), know your customer (KYC) and sanctions as a chief barrier to the provision of trade finance. Furthermore, 77 percent of respondents to the Global Survey cited Basel III regulatory requirements as a significant impediment to trade finance. Many global banks are withdrawing from several emerging-market regions dependent on trade and trade finance, partly due to pressures to favour domestic clients following some banks’ bailouts by taxpayers.

And the fallout can be severe. A shortage of trade finance impacts the growth of businesses worldwide. In particular, small to medium-sized enterprises (SMEs) are being affected by the shortage of bank liquidity. According to the Global Survey, 58 percent of rejected trade-finance proposals were SME applications, despite the sector submitting 44 percent of all trade-finance proposals.

Yet hope is not lost. There are various ways in which the industry can adapt to not only bridge the gap in unmet demand for finance and help revive global growth, but also to evolve the industry, to drive healthy competition and to remove the focus from being global-bank dependent.

Backlash against trade

Improving understanding and attitudes toward trade, and awareness around trade finance, would be a good place to start. Across the world, many have attacked trade and globalisation for threatening jobs and benefitting only big businesses—sentiments that have been evident across the European Union (EU) during Transatlantic Trade and Investment Partnership (TTIP) negotiations, and also during the recent US presidential election campaigns.

Indeed, we’ve seen a clear rise in protectionist and populist policies—a recent World Trade Organization (WTO) report cited that between mid-October 2015 and mid-May 2016, G20 economies had introduced new protectionist trade measures at the fastest pace since 2008. To address this, we need to first make the case for trade itself in order to highlight the importance of trade finance. It is therefore crucial that businesses and trade-finance industry stakeholders reinvigorate the narrative around global trade, relaying its significance to the public and ensuring that trade is on the agenda of policymakers worldwide.

Understanding trade finance.

Next, enhancing awareness around trade finance should also remain a top priority. While there has already been significant progress in the dialogue between trade-finance practitioners and regulators, and a noticeable shift towards a more suitable risk-aligned treatment of trade finance, it is crucial that we continue to emphasise the low risk nature of trade-finance instruments.

Indeed, ICC’s 2015 Trade Register report highlights the low risk nature of trade-finance products—with favourable credit and default-risk experience. For instance, the Trade Register shows that there is a low default rate across all short-term trade-finance products, with the average expected loss for short-term trade finance lower than typical corporate exposures. In particular, traditional documentary trade-finance products such as letters of credit (LC) are low risk. Remarkably, the transaction default rate for export LCs between 2008 and 2014 was 0.01 percent. Medium- to long-term products also fare well, with a low loss nature due to the export credit agency’s (ECA) guarantee—normally with investment-grade ratings and backed by high-income Organisation for Economic Co-operation and Development (OECD) governments.

The need for increased awareness around trade finance extends well beyond traditional trade finance and also includes newer techniques and instruments under the supply-chain finance umbrella. We also need to raise industry understanding around compliance measures—differentiating between client KYC and non-client KYC, for instance, in order to ease processes. In addition, enhanced awareness and understanding in relatively unsettled areas in trade finance, such as trade-based money laundering, would help direct compliance measures. Despite common belief, for instance, only a small proportion of trade-based money laundering actually occurs in trade-finance transactions.

Collaboration

Yet while progress has certainly been made with regulation and compliance proposals, the Global Survey suggests that the costs associated with such measures are still, and will perhaps continue to be, prohibitive. As such, if we want to close the trade-finance gap, we need to move slightly away from a global bank-dominated financial landscape and embrace collaboration.

Financial-technology firms (fintechs) are increasingly shaping the future of trade finance, and make an obvious banking partner, with both parties bringing strengths and expertise to such arrangements. Indeed, many fintechs are looking to partner with—rather than compete with—banks due to balance-sheet requirements, the regulatory framework to navigate, and the industry expertise required to bring new concepts to fruition. Certainly, partnerships between the two players could drive additional efficiencies and the capacity of banks to conduct business—perhaps eventually reducing the trade-finance shortage.

Fintechs aren’t the only players that could potentially collaborate with banks—or even fill the trade-finance gap independently. The Global Survey found that export credit agencies (ECAs) are increasingly supporting export finance, with alternative liquidity flowing into the ECA space. Thirty-seven percent of respondents reported that they had successfully concluded business with institutional investors in ECA finance, up from 30 percent in the previous survey in 2015, reflective of the growing role of alternative investors.

The Global Survey also highlighted the important role of multilateral development banks (MDBs), with 75 percent of respondents agreeing that MDBs (and ECAs) help reduce trade-finance gaps. In particular, MDBs provide financial assistance to emerging markets for investment projects and policy-based loans. This can prove crucial for enabling access to trade finance in general, and for SMEs.

The ADB’s Trade Finance Program (TFP), for instance, fills market gaps for trade finance by providing guarantees and loans through more than 200 banks. The TFP has supported more than 12,000 transactions across Asia, valued at over US$23.1 billion—of which more than 7,700 involved SMEs. What’s more, the TFP focuses on markets in which the private sector has less capacity to provide trade finance, and where there are large trade-finance gaps.

However, the Global Survey also indicated that MDB and ECA support varies by region—with respondents deeming it most effective in advanced Asia, Russia and sub-Saharan Africa, and less effective in Commonwealth of Independent States (CIS) countries, India and Central America and the Caribbean. Clearly, an increase in the envelope and effectiveness of MDB trade-finance provision in these regions will help further reduce the gap. In order to counter geographical disparities, the next step for MDBs is to consider any structural limitations in existing trade-finance programmes—or contextual difficulties in particular markets.

Finally, non-bank capital provides another useful source of trade finance, particularly from private-sector sources of finance—such as specialist financiers or alternative-finance providers. Since the financial crisis, these players have played an increasingly crucial role in meeting unmet demand, and have experienced considerable growth. What’s more, specialist financing is growing increasingly popular among companies in emerging markets, in which trade-finance demand is most acute.

Revamping trade finance.

Of course, one way to possibly boost the provision of trade finance is to make it more efficient and attractive. Certainly, the digitisation of trade finance holds huge potential. Automating trade finance can make overall processes more effective and reliable, increasing capacity for banks, corporates and other stakeholders along the supply chain. For instance, eDocs (paperless documents) streamline processes, with the ability for multiple parties to access, review and collaborate at any one time. The resulting operational improvements in turn reduce errors, maintain data integrity and accelerate the completion of agreements.

Despite the clear benefits, the Global Survey shows that there has been a slow uptake of digitisation. In fact, one-fifth of respondents reported that there is no evident digitisation at all, two-thirds saw very little impact of technology on trade finance, and just over 7 percent saw digitisation as being widespread. The slow uptake is likely due to the challenges of digitising trade—including the considerable scale and complexity of the task at hand, for instance. Banks should play a key role in advocating the benefits of digitisation and help their corporate clients adapt to new systems.

We cannot let the trade-finance gap incapacitate trade. Clearly, there are steps that the trade-finance industry can take to help meet unmet demand. Looking ahead, improving attitudes and raising understanding, encouraging collaboration and making progress towards innovation in the industry will support the growth of businesses of all sizes—and the economy—worldwide.

 

From Global Trade Liquidity Program /IFC

The Global Trade Liquidity Program (GTLP) is a unique, coordinated global initiative that brings together governments, development finance institutions (DFIs), and private sector banks to support trade in developing markets and address the shortage of trade finance resulting from the global financial crisis.

With targeted commitments of $4 billion from public sector sources, the program has supported nearly $20 billion of trade since its inception. It raises funds from international finance and development institutions, governments, and banks, and it works through global and regional banks to extend trade finance to importers and exporters in developing countries. IFC’s commitment to the program is $1 billion.

GTLP began its operations in May 2009, channeling much-needed funds to back trade in developing countries. Phase 2 was launched in January 2010 with an unfunded solution, based on the existing GTLP platform, to support trade finance directed at the food and agribusiness sectors. The program was extended in January 2012 to continue to stabilize and foster trade and commodity finance to emerging markets.

Since its launch, GTLP has been acknowledged in the financial industry as an innovative structure to help infuse much needed liquidity into the trade finance market, thereby catalyzing global trade growth. The solution also represents a win-win proposition: for the banks it provides an opportunity to continue supporting clients through these difficult times; for IFC and its partners, it affords the ability to channel liquidity and credit into markets to help revitalize trade flows by leveraging on the banks’ vast networks across emerging markets in Asia, Africa, Middle East, Europe, and Latin America.

The program is already benefiting thousands of importers and exporters and small- and medium-sized enterprises.

 

From ADB Trade Finance Program

ADB’s Trade Finance Program (TFP) fills market gaps for trade finance by providing guarantees and loans to banks to support trade.

Backed by its AAA credit rating, ADB’s TFP works with over 200 partner banks to provide companies with the financial support they need to engage in import and export activities in Asia’s most challenging markets. With dedicated trade finance specialists and a response time of 24 hours, the TFP has established itself as a key player in the international trade community, providing fast, reliable, and responsive trade finance support to fill market gaps.

A substantial portion of TFP’s portfolio supports small and medium-sized enterprises (SMEs), and many transactions occur either intra-regionally or between ADB’s developing member countries. The program supports a wide range of transactions, from commodities and capital goods to medical supplies and consumer goods.

The TFP continues to grow, supporting billions of dollars of trade throughout the region, which in turn helps create sustainable jobs and economic growth in Asia’s developing countries.

 

 

Key Terms:

  • IFC GTFP (Global Trade Finance Program)
  • IFC GTLP (Global Trade Liquidity Program)
  • IFC GTSF (Global Trade Supplier Finance)
  • IFC GWFP (Global Warehouse Finance Program)
  • SME ( Small and Medium Enterprises)
  • LC (Letter of Credit)
  • DC (Documentary Collections)
  • IFC ( International Finance Corporation)
  • WTO (World Trade Organization)
  • ADB (Asian Development Bank)
  • WB (World Bank)
  • MDB ( Multilateral Development Banks)
  • ECA (Export Credit Agency)
  • Structured Trade
  • Aid for Trade
  • SWIFT
  • BRICS NDB (New Development Bank)
  • ADB TFP (Trade Finance Program)

 

 

Key Sources of Research:

 

Global Trade Liquidity Program

IFC

http://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Industries/Financial+Markets/Trade+and+Supply+Chain/GTLP/

 

 

Trade Finance Program

ADB

https://www.adb.org/site/trade-finance-program

 

 

EXPORTS AND FINANCIAL SHOCKS

Mary Amiti David E. Weinstein

http://www.etsg.org/ETSG2010/papers/amiti.pdf

 

 

Why Boosting the Availability of Trade Finance Became a Priority during the 2008–09 Crisis

Jean-Jacques Hallaert

 

http://siteresources.worldbank.org/INTRANETTRADE/Resources/TradeFinancech14.pdf

 

 

International Trade, Risk, and the Role of Banks

Friederike Niepmann Tim Schmidt-Eisenlohr

September 2013

Revised November 2014

 

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr633.pdf

 

 

International Trade Risk and the Role of Banks

Niepmann, Friederike and Tim Schmidt-Eisenlohr

2015

https://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1151.pdf

 

 

 

Trade finance: developments and issues

Report submitted by a Study Group established by the Committee on the Global Financial System

The Group was chaired by John J Clark, Federal Reserve Bank of New York

January 2014

 

http://www.bis.org/publ/cgfs50.pdf

 

 

Trade finance and SMEs

WTO

 

https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf

 

 

Improving the Availability of Trade Finance during Financial Crises

Marc Auboin

Moritz Meier-Ewert

2003

https://www.wto.org/english/res_e/booksp_e/dis02_e.pdf

 

 

Trade Finance in Financial Crises: Assessment of Key Issues

December 9, 2003

 

http://www.imf.org/external/np/pdr/cr/2003/eng/120903.pdf

 

 

US Trade Finance Guide 2008

http://trade.gov/media/publications/pdf/tfg2008.pdf

 

 

ADDRESSING THE GLOBAL SHORTAGE OF TRADE FINANCE

Doina Buruiana, Project Manager at ICC Banking Commission

December 15, 2016

https://internationalbanker.com/finance/addressing-global-shortage-trade-finance/

 

 

Trade finance around the world

Friederike Niepmann, Tim Schmidt-Eisenlohr

11 June 2016

http://voxeu.org/article/trade-finance-around-world

 

 

The challenges of trade financing

Marc Auboin

28 January 2009

http://voxeu.org/article/challenges-trade-financing

 

 

The role of trade credit financing in international trade

Katharina Eck, Martina Engemann, Monika Schnitzer

20 April 2015

http://voxeu.org/article/role-trade-credit-financing-international-trade

 

 

The global financial crisis: A wake-up call for trade finance capacity building in emerging Asia

Wei Liu, Yann Duval

19 June 2009

http://voxeu.org/article/trade-finance-emerging-asian-economies

 

 

The role of bank guarantees in international trade

Tim Schmidt-Eisenlohr, Friederike Niepmann

26 November 2014

http://voxeu.org/article/role-bank-guarantees-international-trade

 

 

Why does finance matter for trade? Evidence from new data

Marc Auboin, Martina Engemann

03 December 2012

http://voxeu.org/article/why-does-finance-matter-trade-evidence-new-data

 

 

Trade and Trade Finance in the 2008-09 Financial Crisis

Prepared by Irena Asmundson, Thomas Dorsey, Armine Khachatryan, Ioana Niculcea,

and Mika Saito

January 2011

http://www19.iadb.org/intal/intalcdi/PE/2011/07364.pdf

https://www.imf.org/external/pubs/ft/wp/2011/wp1116.pdf

 

 

 

Enhanced Attention for Trade Finance

Andrew Cornford

 

http://www.networkideas.org/wp-content/uploads/2016/08/Trade_Finance.pdf

 

 

 

 

RETHINKING TRADE & FINANCE 2016

ICC Global Survey on Trade Finance

 

http://store.iccwbo.org/content/uploaded/pdf/ICC_Global_Trade_and_Finance_Survey_2016.pdf

 

 

2016 TRaDE FINaNCE GaPS, GROwTh, aND JObS SURvEY

 

alisa Di Caprio Ying Yao Steven beck Fahad Khan

ADB

 

https://www.adb.org/sites/default/files/publication/190631/trade-finance-gaps.pdf

 

 

Articles on Trade Finance

The Banker.com

http://www.thebanker.com/Transactions-Technology/Trade-Finance

 

 

2016 State of Supply Chain Finance Industry

 

http://www.seaburygroup.com/wp-content/uploads/2016/04/2016-State-of-SCF-April-15.pdf

 

 

ICC Global Survey on Trade Finance

 

http://www.iccwbo.org/Products-and-Services/Trade-facilitation/ICC-Global-Survey-on-Trade-Finance/

 

 

 

 

TRADE AND DEVELOPMENT REPORT, 2016

UNCTAD

 

http://unctad.org/en/PublicationsLibrary/tdr2016_en.pdf

 

 

No Guarantees, No Trade: How Banks Affect Export Patterns

Friederike Niepmann Tim Schmidt-Eisenlohr

2016

 

https://www.federalreserve.gov/econresdata/ifdp/2016/files/ifdp1158.pdf

 

 

Understanding Trade Finance: Theory and Evidence from Transaction-level Data

Jae Bin Ahn

International Monetary Fund

August, 2015

 

 

Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis

Davin Chor Kalina Manova

2010

https://www.newyorkfed.org/medialibrary/media/research/conference/2010/global/manova_presentation.pdf

http://www.nber.org/papers/w16174.pdf

 

 

Trade Finance during the Great Trade Collapse

Jean-Pierre Chauffour and Mariem Malouche

2011

 

http://econ.sciences-po.fr/sites/default/files/file/pmartin/Trade-Finance-finalpdf.pdf

 

 

Why Trade Finance matters for Trade

WTO/IFC

 

https://www.wto.org/english/forums_e/public_forum14_e/pf14wks_e/ifcwks3.pdf

 

 

TRADE FINANCE IN PERIODS OF CRISIS: WHAT HAVE WE LEARNED IN RECENT YEARS?

Marc Auboin and Martina Engemann

2013

https://www.wto.org/english/res_e/reser_e/ersd201301_e.pdf

 

 

Global Finance Names The World’s Best Trade Finance Providers 2016

https://www.gfmag.com/media/press-releases/global-finance-names-worlds-best-trade-finance-providers-2016

https://www.gfmag.com/magazine/february-2016/worlds-best-trade-finance-providers-2016-table-contents

 

 

The Trade Finance Business of U.S. Banks

Friederike Niepmann and Tim Schmidt-Eisenlohr

MAY 19, 2014

http://libertystreeteconomics.newyorkfed.org/2014/05/the-trade-finance-business-of-us-banks.html

 

 

Why U.S. Exporters Use Letters of Credit

Friederike Niepmann and Tim Schmidt-Eisenlohr

2014

http://libertystreeteconomics.newyorkfed.org/2014/05/why-us-exporters-use-letters-of-credit.html

 

 

WHAT DRIVES BANK-INTERMEDIATED TRADE FINANCE? EVIDENCE FROM CROSS-COUNTRY ANALYSIS 

José María Serena Garralda

Garima Vasishtha

2015

http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/15/Fich/dt1524e.pdf

 

 

The impact of Basel III on trade finance

Author: Bc. Jana Malešová

Masters Thesis

 

 

 

The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action

Prepared by Michaela Erbenová, Yan Liu, Nadim Kyriakos-Saad, Alejandro López-Mejía, Giancarlo Gasha, Emmanuel Mathias, Mohamed Norat, Francisca Fernando, and Yasmin Almeida1

2016

 

https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf

 

 

Leveraging Supply Chain Finance for Development

Alexander R. Malaket

September 2015

 

http://e15initiative.org/wp-content/uploads/2015/07/E15-Finance-Malaket-final.pdf

 

 

 

Trade Finance: A Catalyst for Asian Growth

Claude Lopez

2015

 

https://mpra.ub.uni-muenchen.de/66250/1/MPRA_paper_66250.pdf

 

 

 

Trade Flows in Developing Countries: What is the Role of Trade Finance?

 

Clara Brandi Birgit Schmitz

 

https://www.die-gdi.de/uploads/media/DP_13.2015.pdf

 

 

Financing Global Development: The Potential of Trade Finance

http://www.good-governance-debates.de/wp-content/uploads/2015/03/13_BP_10.2015.pdf

Oscillations and Amplifications in Demand-Supply Network Chains

Oscillations and Amplifications in Demand-Supply Network Chains

 

From Modeling and Measuring the Bullwhip Effect

Demand variability and uncertainty is a driver of supply chain inventory. Managing supply chains can be a challenge when demand variability and uncertainty is high. For a company in a supply chain consisting of multiple stages, each of which is run by a separate organization (or company), the variability of demand faced by this company can be much higher than the variability faced by downstream stages (where “downstream stages” refers to the stages closer to the final consumption of the product). The bullwhip effect refers to the phenomenon where demand variability amplifies as one moves upstream in a supply chain (Lee et al, 1997a, or LPW). LPW described this as a form of demand information distortion. Lee et al (1997b) further discussed the managerial and practical aspects of the bullwhip effect, giving more industry examples. The bullwhip effect phenomenon is closely related to studies in systems dynamics (Forrester, 1961; Sterman, 1989; Senge, 1990). Sterman (1989) observed a systematic pattern of demand variation amplification in the Beer Game, and attributed it to behavioral causes (i.e., misperceptions of feedback). Macroeconomists have also studied the phenomenon (Holt et al, 1968; Blinder, 1981; Blanchard, 1983).

 

From Operational and Behavioral Causes of Supply Chain Instability

 

Supply chain instability is often described as the bullwhip effect, the tendency for variability to increase at each level of a supply chain as one moves from customer sales to production (Lee et al. 1997, Chen et al. 2000). While amplification from stage to stage is important, supply chain instability is a richer and more subtle phenomenon. The economy, and the networks of supply chains embedded within it, is a complex dynamic system and generates multiple modes of behavior. These include business cycles (oscillation), amplification of orders and production from consumption to raw materials (the bullwhip), and phase lag (shifts in the timing of the cycles from consumption to materials). High product returns and spoilage are common in industries from consumer electronics to hybrid seed corn (Gonçalves 2003). Many firms experience pronounced hockey-stick patterns in which orders and output rise sharply just prior to the end of a month or quarter as the sales force and managers rush to hit revenue goals. Boom and bust dynamics in supply chains are often worsened by phantom orders—orders customers place in response to perceived shortages in an attempt to gain a greater share of a shrinking pie (T. Mitchell 1923, Sterman 2000, ch. 18.3, Gonçalves 2002, Gonçalves and Sterman 2005).

What are the causes of supply chain instability? Why does supply chain instability persist, despite the lean revolution and tremendous innovations in technology? What can be done to stabilize supply chains and improve their efficiency?

Here I describe the origins of supply chain instability from a complex systems perspective. The dynamics of supply chain networks arise endogenously from their structure. That structure includes both operational and behavioral elements.

 

From Operational and Behavioral Causes of Supply Chain Instability

Oscillation, Amplification, and Phase Lag

Exhibit 1 shows industrial production in the US. The data exhibit several modes of behavior. First, the long-run growth rate of manufacturing output is about 3.4%/year. Second, as seen in the bottom panel, production fluctuates significantly around the growth trend. The dominant periodicity is the business cycle, a cycle of prosperity and recession of about 3–5 years in duration, but exhibiting considerable variability.

The amplitude of business cycle fluctuations in materials production is significantly greater than that in consumer goods production (exhibit 2). The peaks and troughs of the cycle in materials production also tend to lag behind those in production of consumer goods. Typically, the amplitude of fluctuations increases as they propagate from the customer to the supplier, with each upstream stage tending to lag behind its customer. These three features, oscillation, amplification, and phase lag, are pervasive in supply chains.

 

From Booms, Busts, and Beer: Understanding the Dynamics of Supply Chains

A central question in operations management is whether the oscillations, amplification and phase lag observed in supply chains arise as the result of operational or behavioral causes.

Operational theories assume that decision makers are rational agents who make optimal decisions given their local incentives and information.  Supply chain instability must then result from the interaction of rational actors with the physical and institutional structure of the system.

  • Physical structure includes the network linking customers and suppliers and the placement of inventories and buffers within it, along with capacity constraints and time delays in production, order fulfillment, transportation, and so on.
  • Institutional structure includes the degree of horizontal and vertical coordination and competition among firms, the availability of information to decision makers in each organization, and the incentives faced by each decision maker.

Behavioral explanations also capture the physical and institutional structure of supply chains, but view decision makers as boundedly rational actors with imperfect mental models, actors who use heuristics to make ordering, production, capacity acquisition, pricing and other decisions (Morecroft 1985, Sterman 2000, Boudreau et al. 2003, Gino & Pisano 2008, Bendoly et al. 2010, Croson et al. 2013).

Amplifications and Phase Lag

Amplification and phase lag arise from the presence of basic physical structures including stocks of inventory and delays in adjusting production or deliveries to changes in incoming orders.

Oscillations

Oscillations, however, are not inevitable. They arise from boundedly rational, behavioral decision processes

The difference matters: if supply chain instability arises from operational factors and rational behavior, then policies must be directed at changing the physical and institutional structure of the system, including incentives.

If, however, instability arises from bounded rationality and emotional arousal such policies may not be sufficient.

 

Key People:

  • Jay W Forrester
  • John Sterman
  • Rogelio Oliva
  • Hau L Lee

 

Key Terms:

  • Bullwhip Effect
  • Oscillations
  • Amplifications
  • Negative Feedback Loop
  • Positive Feedback Loop
  • Phase Lag
  • Supply Chain Networks
  • Inventory Management
  • Production Smoothening
  • Beer Distribution Game
  • Industrial Dynamics
  • Operational and Institutional Structures
  • Behavioral causes
  • Instability
  • Variability
  • Uncertainty

 

Key Sources of Research:

 

Behavioral Causes of Demand Amplification in Supply Chains: “Satisficing” Policies with Limited Information Cues

Rogelio Oliva

Paulo Gonçalves

 

http://systemsmodelbook.org/uploadedfile/1889_087eb4f1-0532-4a7d-a206-3d565efc02af_2005-OLIVA133.pdf

 

 

REDUCING THE IMPACT OF DEMAND PROCESS VARIABILITY WITHIN A MULTI-ECHELON SUPPLY CHAIN

Francisco Campuzano Bolarín1,Lorenzo Ros Mcdonnell1, Juan Martín García

2008

 

https://www.systemdynamics.org/conferences/2008/proceed/papers/CAMPU215.pdf

 

 

The impact of order variance amplification/dampening on supply chain performance

 

Robert N. Boute, Stephen M. Disney, Marc R. Lambrecht and Benny Van Houdt

 

https://lirias.kuleuven.be/bitstream/123456789/228638/2/KBI_0603.pdf

 

 

Coping with Uncertainty: Reducing ”Bullwhip” Behaviour in Global Supply Chains

 

Rachel Mason-Jones, and Denis R. Towill

https://pdfs.semanticscholar.org/049d/24557527da7aa9da7de238fe7f4a463b2af6.pdf

 

 

Bullwhip in Supply Chains ~ Past, Present and Future

Steve Geary Stephen M Disney and Denis R Towill

 

https://pdfs.semanticscholar.org/8a76/492a6e6ae1d0f186fe2570b7477428e8e467.pdf

 

 

Shrinking the Supply Chain Uncertainty Circle

R Mason-Jones

http://www.enterrasolutions.com/media/docs/2011/02/19980901d.pdf

 

 

THE BULLWHIP EFFECT IN SUPPLY CHAIN Reflections after a Decade

Gürdal Ertek, Emre Eryılmaz

 

http://ertekprojects.com/gurdal-ertek-publications/wp-content/uploads/2014/07/ertek_eryilmaz_cels2008.pdf

 

 

Information distortion in a supply chain: The bullwhip effect

Hau L Lee; V Padmanabhan; Seugjin Whang

Management Science; Apr 1997; 43, 4;

https://pdfs.semanticscholar.org/675c/f26117d56ab96aabe2d6cee4c390ab20ee18.pdf

 

 

 

THE SUPPLY CHAIN COMPLEXITY TRIANGE: UNCERTAINTY GENERATION IN THE SUPPLY CHAIN

 

https://core.ac.uk/download/pdf/140687.pdf

 

 

The Bullwhip Effect in Supply Chains

Hau L. Lee, V. Padmanabhan and Seungjin Whang

1997

http://sloanreview.mit.edu/article/the-bullwhip-effect-in-supply-chains/

 

 

The Bullwhip Effect: Analysis of the Causes and Remedies

 

Jonathan Moll

Rene Bekker

 

https://www.few.vu.nl/nl/Images/werkstuk-moll_tcm243-354834.pdf

 

 

‘BULLWHIP’ AND ‘BACKLASH’ IN SUPPLY PIPELINES

Vinaya Shukla, Mohamed M Naim, Ehab A Yaseen

 

https://hal.archives-ouvertes.fr/hal-00525857/document

 

 

How human behaviour amplifies the bullwhip effect – a study based on the beer distribution game online

Joerg Nienhaus, Arne Ziegenbein*, Christoph Duijts

 

http://www.beergame.lim.ethz.ch/Bullwhip_Effect_Article.pdf

 

 

The Bullwhip Effect in Different Manufacturing Paradigm: An Analysis

Shamila Nabi KHAN1 Mohammad Ajmal KHAN2 Ramsha SOHAIL

 

http://www.management.ase.ro/reveconomia/2014-1/11.pdf.pdf

 

 

On replenishment rules, forecasting and the bullwhip effect in supply chains

Stephen M. Disney1 and Marc R. Lambrecht

 

https://orca-mwe.cf.ac.uk/19648/1/Disney%20-%20On%20replenishment%20rules%20forecasting%20and%20the%20bullwhip%20effect%20in%20supply%20chains%20pre%20print.pdf

 

 

Causes and Remedies of Bullwhip Effect in Supply Chain

Sivakumar Balasubramanian Larry Whitman Kartik Ramachandran Ravindra Sheelavant

 

http://webs.wichita.edu/depttools/depttoolsmemberfiles/lewhitman/Papers/Pre2007/2001IERCBullwhip.pdf

 

 

Booms, Busts, and Beer: Understanding the Dynamics of Supply Chains

John Sterman

 

http://jsterman.scripts.mit.edu/docs/Sterman%20Beh%20Ops%20Handbook%20Chapter%20140210.pdf

 

 

Modeling and Measuring the Bullwhip Effect

Li Chen and Hau L. Lee

2015

https://faculty.fuqua.duke.edu/~lc91/More/papers/Chen_Lee_Bullwhip_2015.pdf

 

 

Operational and Behavioral Causes of Supply Chain Instability

John D. Sterman

https://pdfs.semanticscholar.org/81cc/2a3118c5c7d2bd475335549b0b943009d66c.pdf

 

 

Order Stability in Supply Chains: Coordination Risk and the Role of Coordination Stock

Rachel Croson, Karen Donohue, Elena Katok, and John Sterman

http://jsterman.scripts.mit.edu/docs/Order%20Stability%20in%20SCs050212.pdf

http://web.mit.edu/jsterman/www/Order_Stability_070505.pdf

 

 

SUPPLY CHAIN DYNAMICS, THE “BEER DISTRIBUTION GAME” AND MISPERCEPTIONS IN DYNAMIC DECISION MAKING

John D. Sterman

https://www.eolss.net/Sample-Chapters/C15/E6-63-01-02.pdf

 

 

When Do Minor Shortages Inflate To Great Bubbles?

Paulo Gonçalves

2002

 

http://www.systemdynamics.org/conferences/2002/proceed/papers/Gonca1.pdf

 

 

A new technology paradigm for collaboration in the supply chain

Branko Pecar and Barry Davies

https://pdfs.semanticscholar.org/a123/c522d454d1dc036a22db29b2dee005dbc44e.pdf

 

 

MANAGERIAL INSIGHTS ON THE IMPACT OF FORECASTING AND INFORMATION ON VARIABILITY IN A SUPPLY CHAIN

Frank Chent, Zvi Drezner2 , Jennifer K. Ryan3 and David Simchi-Levi

 

https://dvikan.no/ntnu-studentserver/kompendier/4%20chen.pdf

 

 

Supply and Production Networks: From the Bullwhip Effect to Business Cycles

Dirk Helbing Stefan Laemmer

2004

 

http://samoa.santafe.edu/media/workingpapers/04-12-033.pdf

 

 

Inventory dynamics and the bullwhip effect : studies in supply chain performance

Udenio, M.

2014

 

https://pure.tue.nl/ws/files/3746347/776508.pdf

 

 

RECENT WORK ON BUSINES CYCLES IN HISTORICAL PERSPECTIVE: REVIEW OF THEORIES AND EVIDENCE

VictorZarnowitz

1984

 

http://www.nber.org/papers/w1503.pdf

 

 

THEORY AND HISTORY BEHIND BUSINESS CYCLES:ARE THE 1990S

THE ONSET OF A GOLDEN AGE?

 

Victor Zarnowitz

WorkingPaper7010 htp:/w.nber.org/papers/w7010

1999

 

http://www.nber.org/papers/w7010.pdf

 

 

The Beginning of System Dynamics

Jay W. Forrester

 

http://web.mit.edu/sysdyn/sd-intro/D-4165-1.pdf

 

 

Profiles in Operations Research: Jay Wright Forrester

David C. Lane John D. Sterman

 

http://www.systemdynamics.org/jwf-profile-in-op.pdf

 

 

SYSTEM DYNAMICS MODELLING IN SUPPLY CHAIN MANAGEMENT: RESEARCH REVIEW

2000

 

https://pdfs.semanticscholar.org/9d68/54fe11ea0aaa47f4c8e08959be2ef52d50a6.pdf

 

 

INDUSTRIAL DYNAMICS-AFTER THE FIRST DECADE

JAY W. FORRESTER

 

http://www.sfu.ca/~vdabbagh/Forrester68.pdf

 

 

Industrial Dynamics

Jay W Forrester

1961

 

 

Business Dynamics

John Sterman

2000

 

Jay W. Forrester and System Dynamics

Jay W. Forrester and System Dynamics

 

 

Jay Forrester passed away at the age of 98 on November 16, 2016

The link below will take you to JWF memorial webpage.

Jay W Forrester Memorial Web Page at the System Dynamics Society

I admire Jay W Forrester greatly.  I was introduced to Operational Research and System dynamics back in early 1980s after I graduated from IIT Roorkee Engineering undergraduate degree in India.  I had bought a book on Operations Research at a road side book seller in Dariya Ganj, Old Delhi, India.

I met Jay on three occasions.  I attended Business Dynamics Executive Education program at MIT Sloan School of Management back in 2002.  Jay was one of the Instructor.  Then I again met Jay at 2003 SDS International Conference at New York City.  Last time I met Jay was in Washington DC at the Club of Rome Symposium celebrating 40 yrs anniversary of publication of The Limits to Growth book.

Jay will be missed greatly.

– Mayank Chaturvedi

 

Jay Forrester’s vision of future of Economics and System Dynamics.

Traditional mainstream academic economics, by trying to be a science, has failed to answer major questions about real- life economic behavior. Economics should become a systems profession, such as management, engineering, and medicine. By closely observing the structures and policies in business and government, simulation models can be constructed to answer questions about business cycles, causes of major depressions, inflation, monetary policy, and the validity of descriptive economic theories. A system dynamics model, as a general theory of economic behavior, now endogenously generates business cycles, Kuznets cycles, the economic long wave, and growth. A model is a theory of the behavior that it generates. The economic model provides the theory, thus far missing from economics, for the Great Depression of the 1930s and how such episodes can recur 50–70 years apart. Simpler system dynamics models can become the vehicle for a relevant and exciting pre-college economics education.

 

From PHD thesis of I David Wheat

Within the interdisciplinary system dynamics (SD) community, the motivation to improve understanding of economic systems came nearly fifty years ago with Jay W. Forrester’s seminal call for a new kind of economics education, a call that he has renewed in the K-12 education setting in recent years. John Sterman’s encyclopedic Business Dynamics is a symbol not only of the breadth of his own economic policy and management research and teaching but also the range of work done by others in this field.

Teaching the economics of resource management with system dynamics tools has been the devotion of Andrew Ford and Erling Moxnes. James Lyneis took his management consultant’s expertise into the university classroom and developed an SD-based microeconomics course. Economists Michael Radzicki and Kaoru Yamaguchi have developed complete graduate-level economics courses on a system dynamics foundation. An informal survey produced this list of others who have used SD as a teaching tool in economics courses: Glen Atkinson, Scott Fullwiler, John Harvey, Steve Keen, Ali Mashayekhi, Jairo Parada, Oleg Pavlov, Khalid Saeed, Jim Sturgeon, Linwood Tauheed, Pavlina Tcherneva, Scott Trees, Eric Tymoigne, Lars Weber, and Agnieszka Ziomek, and that is surely just a fraction.

 

Key Sources of Research:

 

Economic theory for the new millennium

Jay W. Forrester

2003

 

System Dynamics Review vol 29, No 1 (January-March 2013): 26–41

 

 

 

Three slices of Jay Forrester’s general theory of economic behavior: An interpretation

 

Khalid Saeed

Worcester Polytechnic Institute Worcester, MA, USA

February 13, 2013

 

http://www.systemdynamics.org/conferences/2013/proceed/papers/P1018.pdf

 

 

System Dynamics: A disruptive science

A conversation with Jay W. Forrester, founder of the field

Khalid Saeed Worcester Polytechnic Institute Sept. 2013

 

http://static.clexchange.org/ftp/ISDC2013_forresterchat.pdf

http://digitalcommons.wpi.edu/cgi/viewcontent.cgi?article=1000&context=ssps-papers&sei-redir=1&referer=https%3A%2F%2Fscholar.google.com%2Fscholar%3Fstart%3D40%26q%3Djay%2Bw%2Bforrester%2Bsystem%2Bdynamics%26hl%3Den%26as_sdt%3D0%2C47%26as_ylo%3D2013#search=%22jay%20w%20forrester%20system%20dynamics%22

 

 

Unintended Consequences

Jay Forrester

http://simgua.com/documents/SB_Forrester.pdf

 

 

A dynamic synthesis of basic macroeconomic theory : implications for stabilization policy analysis

Nathan Forrester

PHD THESIS

https://dspace.mit.edu/handle/1721.1/15739

 

 

SYSTEM DYNAMICS: PORTRAYING BOUNDED RATIONALITY

 

John D.W. Morecroft

1982

 

https://dspace.mit.edu/bitstream/handle/1721.1/49181/systemdynamicspo00more.pdf?sequence=1

 

 

THE SYSTEM DYNAMICS NATIONAL MODEL:  MACRO BEHAVIOR FROM MICRO STRUCTURE

JAY W FORRESTER

 

http://systemsmodelbook.org/uploadedfile/1470_0a924c5b-b909-42fa-be9b-932588278f36_forre004.pdf

 

 

1976 Economic Forecast Report including studies by Jay W Forrester and Nathial Mass

US congress Joint Economic Review of US Economy

http://njlaw.rutgers.edu/collections/gdoc/hearings/7/76603310f/76603310f_1.pdf

 

 

Backround Material for a Meeting on Long Waves, Depression and Innovation –

IMPLICATIONS FOR NATIONAL AND REGIONAL ECONOMIC POLICY

Jay W. Forrester, Alan K.Oraham, Peter M.Senge, John D Sterman

 

Siena/Florence, October 26-29, 1983

Bianchi, G., Bruckmann, G. and Vasko, T.

 

http://pure.iiasa.ac.at/2338/1/CP-83-044.pdf

 

 

 

Industrial Dynamics-After the First Decade

Author(s): Jay W. Forrester

Management Science, Vol. 14, No. 7, Theory Series (Mar., 1968), pp. 398-415

 

http://www.sfu.ca/~vdabbagh/Forrester68.pdf

 

 

Systems Analysis as a Tool for Urban Planning

JAY W. FORRESTER, FELLOW, IEEE

1970

 

http://web.boun.edu.tr/ali.saysel/ESc59M/forrester.pdf

 

 

IS ECONOMETRIC MODELING OBSOLETE?

AUTHOR: Mr. Oakley E. Van Slyke

 

https://www.casact.org/pubs/dpp/dpp80/80dpp650.pdf

 

 

Money and Macroeconomic Dynamics : Accounting System Dynamics Approach

 

Kaoru Yamaguchi

Ph.D. Japan Futures Research Center

Awaji Island, Japan

November 11, 2016

 

http://muratopia.org/Yamaguchi/macrodynamics/Macro%20Dynamics.pdf

 

 

The Feedback Method : A System Dynamics Approach to Teaching Macroeconomics

I. David Wheat, Jr.

Dissertation for the degree philosophiae doctor (PhD)

System Dynamics Group, Social Science Faculty University of Bergen

 

http://bora.uib.no/bitstream/handle/1956/2239/Introduction_David_Wheat.pdf?sequence=46

 

 

Disequilibrium Systems Representation of Growth Models—Harrod-Domar, Solow, Leontief, Minsky, and Why the U.S. Fed Opened the Discount Window to Money-Market Funds

Frederick Betz

2015

 

http://file.scirp.org/pdf/ME_2015120814432915.pdf

 

 

Cyclical dynamics of airline industry earnings

Kawika Piersona and John D. Sterman

System Dynamics Review vol 29, No 3 (July-September 2013): 129–156

https://www.researchgate.net/profile/John_Sterman2/publication/259542762_Cyclical_dynamics_of_airline_industry_earnings/links/5550ead108ae739bdb9202a9.pdf

 

 

 

Modeling Financial Instability

Steve Keen

http://www.debtdeflation.com/blogs/wp-content/uploads/2014/02/Keen2014ModelingFinancialInstability.pdf

 

 

Harvey, J.T.,

2013.

Keynes’s trade cycle: a system dynamics model.

Journal of Post Keynesian Economics, 36(1), pp.105-130.

 

 

ECONOMICS, TECHNOLOGY, AND THE ENVIRONMENT

Jay Forrester

 

https://dspace.mit.edu/bitstream/handle/1721.1/2197/SWP-1983-18213738.pdf?sequence=1

 

 

Forrester, J. W. (1968). Market Growth as Influenced by Capital Investment. Industrial Management Review (now Sloan Management Review), 9(2), 83-105.

 

 

Forrester, J. W 1971). Counterintuitive Behavior of Social Systems. Collected Papers of J.W. Forrester. Cambridge, MA: Wright-Allen Press.

 

 

Forrester, J. W (1976). Business Structure, Economic Cycles, and National Policy. Futures, June.

 

 

Forrester, J. W (1979). An Alternative Approach to Economic Policy: Macrobehavior from Microstructure. In Kamrany & Day (Eds.), Economic Issues of the Eighties. Baltimore: The Johns Hopkins University Press.

 

 

Forrester, J. W., Mass, N. J., & Ryan, C. (1980). The System Dynamics National Model: Understanding Socio-economic Behavior and Policy Alternatives. Technology Forecasting and Social Change, 9, 51-68.

 

 

Forrester, N. B. (1982). A Dynamic Synthesis of Basic Macroeconomic Theory: Implications for Stabilization Policy Analysis. Unpublished PhD dissertation, Massachusetts Institute of Technology, Cambridge, MA.

 

 

Low, G. (1980). The Multiplier-Accelerator Model of Business Cycles Interpreted from a System Dynamics Perspective. In J. Randers (Ed.), Elements of the System Dynamics Method. Cambridge, MA: MIT Press.

 

 

Mass, N. J. (1975). Economic Cycles: An Analysis of Underlying Causes. Cambridge, MA: Wright-Allen Press, Inc.

 

 

Mass, N. J.(1980). Stock and Flow Variables and the Dynamics of Supply and Demand. In J. Randers (Ed.), Elements of the System Dynamics Method. (pp. 95-112). Cambridge, MA: MIT Press.

 

 

Meadows, D. L., Behrens III, W. W., Meadows, D. H., Naill, R. F., & Zahn, E. (1974). Dynamics of Growth in a Finite World. Cambridge, MA: Wright-Allen Press.

 

 

Morecroft, J. D. W. & Sterman, J. D. (Eds.). (1994). Modeling for Learning Organizations. Portland, OR: Productivity Press.

 

 

Radzicki, M. (1993). A System Dynamics Approach to Macroeconomics (Guest lecture at the Department of Information Science, University of Bergen.).

 

 

Richardson, G. P. (1991). Feedback Thought in Social Science and Systems Theory. Waltham, MA: Pegasus Communications, Inc.

 

 

Senge, P. M. (1990). The Fifth Discipline: The Art and Practice of the Learning Organization. New York: Doubleday.

 

 

Sterman, J. D. (1985). A Behavioral Model of the Economic Long Wave. Journal of Economic Behavior and Organization, 6, 17-53.

 

 

Sterman, J. D. (2000). Business Dynamics: Systems Thinking and Modeling for a Complex World. Boston, MA: McGraw-Hill Companies.