IBSi Blogs

Everyone has a digital identity that represents you as a unique individual. But, says Dr Michael Gorriz, group chief information officer at Standard Chartered Bank, that which distinguishes you in the physical world is generally irrelevant to how you are identified in the digital one

The challenge for banks, technology firms and governments is how to make it easier and safer for people to identify themselves online while allowing them control over and giving consent for use of their digital identity (DI). These days, you are asked to create a new login when you apply for each new service, so you potentially have to log in your details a few times a day and remember multiple passwords. A universal DI for everything would make life much more convenient.

Passports, driving licences, birth certificates – documents that identify us in the physical world will no longer be necessary. A business trip or vacation would be a seamless experience, where passport control may no longer be required, and banking services will be a breeze because of robust and trustworthy KYC (know your customer) processes.

Some governments have taken the lead as part of their development of digital economies. With Singapore’s MyInfo one-stop database of personal data, citizens can apply for government services or open a bank account without filling in multiple forms or providing supporting documents. India’s Aadhaar project provides a unique ID to each citizen so they have access to healthcare services, education and government subsidies. It is a key driver of socio-economic development and ensures benefits directly reach unbanked pockets of the population.

The role of financial institutions

Banks need to give their customers a seamless and convenient experience. That is why Standard Chartered has participated in pioneering DI initiatives such as PayNow in Singapore which makes peer-to-peer payment easy as it only requires your national ID or mobile number. The development of a universal identity system needs robust processes to recognise and authenticate a person’s data. The system also has to work for myriad institutions with complex, interconnected operations across different geographies.

Financial institutions including banks have traditionally performed the role of custodians of data and have established cross-border operations, so are well-positioned to support the creation of DI systems. Banks are also incentivised to collect accurate data because the viability of their business depends on it.

New anti-money laundering directives and KYC rules mean regulators expect financial institutions to maintain high standards for identity verification of new and existing customers. To that end, Standard Chartered has started a proof of concept with fintech firm, KYC Chain, to improve our client onboarding process. The project, which uses blockchain technology, can recognise and verify identities of clients in a reliable way. Blockchain allows entities independent of one another to rely on the same shared, secure, auditable source of information.

Who owns the data?

Any universal identity system should allow the ownership of personal data to lie with the individual, who chooses what information to share to gain access to services. Bblockchain, the distributed-ledger technology behind the digital currency Bitcoin, has been seen as providing a potential technology solution.

With about half of the world connected to the internet, having a DI is in some quarters regarded as a fundamental human right, because proof of identity is required to gain access to a range of services. Achieving a universal DI would have many advantages but making it work would require cooperation among financial institutions, governments, technology companies and more. The benefits in terms of cost, time and user satisfaction are so great that we are optimistic a comprehensive and holistic solution may not be too far in the future.

Last week a technological glitch at the Bank of England led to delays on transactions across the whole of the UK, illustrating how technology related glitches are still very much a thing of the present. This type of issue is nothing new, and has been known to have monumental consequences in other scenarios. For example, in 2012 it took just 30 minutes for Knight Capital to lose $440 million because of glitches in newly deployed code. The incident became the infamous poster child of the perilous reputational consequences of poorly monitored trading infrastructure. The recent BofE problem, although thankfully limited to some panic around the whereabouts of a much needed January pay check, does highlight that the financial services industry still needs to prioritise creating safeguards to monitor and anticipate problems in complex IT systems.

So how can the various stakeholders in electronic trading become more proactive in minimising technological risk and protect their reputation? Part of the answer lies in better real-time monitoring.

Reputation is intangible.  A reputation can be tarnished when a bank fails to meet its expected obligations to its stakeholders: its customers, the regulatory and the public at large. On an executive level, acts that sabotage reputation include financial mismanagement and breaching codes of governance. On a lower level, poor customer service and inappropriate behaviour may pose a risk.

However, these are largely reputational risks stemming from human error or misconduct. But in an increasingly automated environment, technology is also a key driver of reputational losses. The high-octane world of financial trading is a prime example of technology’s paradoxical effects.  On the one hand, algorithms and machines can eliminate labour and make processes, such as executing trading strategies both faster and more efficient. On the other hand, when things go wrong, they go wrong in catastrophic proportions.

While the electronification of trading has created a more robust audit trail than ever before, banks’ inability to keep up with and process this information often leads to disasters.

Investment banks

Investment banks provide execution services to traders including algorithmic trading, order routing and direct market across different venues as well as, sometimes,  in-house (such as a dark pool).  The complexity of a bank’s IT operations – a myriad of numerous applications, servers and users – poses a monitoring challenge.  In addition, banks also have increasing regulatory obligations, with a growing pressure to stamp out illegal or abnormal activity and to provide more granular reporting.

In 2013, the EU imposed a $2.3 billion fine on 6 global banking giants for rigging the Libor rates.  In most of these cases, an adequate real-time trade surveillance system would have provided early notifications of illegal activities and could have minimised damage.  By analysing a combination of network data flowing through multiple systems and real-time log data from applications, banks have complete real-time visibility of trading activities.  This data can be visualised or stored for compliance purposes. By having a single pane of glass across different systems, banks can bring illegal activity out of the shadows more quickly and into the hands of compliance professionals, and not the newspaper headlines. Furthermore, they can mine this data for market intelligence on how and what their clients are trading, and use these insights to drive their strategies to achieve, and maintain, competitive edge

Exchanges

Similar to large investment banks, global stock exchanges have a highly-distributed trading and market data infrastructure. With increasing trading volumes and high-speed trading, exchanges are under pressure to optimise operational performance and to meet customer and regulatory expectations.

Exchanges must offer rapid access to liquidity and process millions of trades per second at up-to-date prices.  In order to maintain this, they must monitor their complex infrastructure in real time and correlate all order events as they encounter gateways, middleware matching engines and market data streams.  Tracking trades requires pulling information from different sources across the trading infrastructure and using high-performance analytics to calculate latencies between the various checkpoints in the lifecycle of each trade. This information can further be sliced and diced to see how execution performance varies across different times of the day, different clients and different symbols.

Poor performance with stock exchanges trickles down to the rest of the financial system, including the broker-dealers, market-makers and the end-investors.  Equally, the effects of having good technology will be felt and recognised by the wider financial community.

To a certain degree, fines, losses, and reputational damage are unavoidable and unexpected.  Firms need to act quickly to remedy and minimise damage when catastrophes occur. However, prevention is always better than cure and this is where technology comes in.  Better technology leads to better decision-making and minimising avoidable errors. It not only mitigates risk but is also a competitive advantage, giving financial institutions better visibility into what is going on in their business and how to use it to their gain.

Jay Patani

Tech Evangelist,  ITRS

Cybercrime is an ever-increasing risk for financial institutions. While the wealth management industry has thus far been less affected by major breaches than other sectors, wealth managers should be arming themselves with the right tools in the fight against hackers.

A DDoS attack is one of the biggest cyber threats currently faced by fintech companies. This ‘distributed denial of service’ occurs when cybercriminals flood a website with traffic in order to overwhelm it and shut down services. The very nature of their business makes financial institutions an obvious target for hackers; attacks are relatively easy to launch and smaller companies’ systems can be overwhelmed by them.

The motives for these attacks can vary but might include demanding a ransom in return for stopping the attack, or as a diversion to tie up security staff while hackers carry out a more significant assault. The good news for smaller companies is that, unlike their larger rivals, they are unhampered by cumbersome legacy systems. Agility, innovation and collaboration are key to combating cybercrime, and small firms can harness the power of cloud-based DDoS protection services.

It’s all down to your capacity

These services have a huge network capacity so they can filter out large amounts of DDoS traffic without being overwhelmed. This allows legitimate traffic from customers to get through without interruption. This can also be used to intercept scanning activity. ‘Scanning activity’ is used by hackers to attempt to scan a company’s computer systems by sending traffic to its network in the hope of finding software with known vulnerabilities that can be exploited.

Criminals may also try to gain access through social engineering. This often involves emailing or calling staff and tricking them into believing they are talking to a fellow employee. A workforce that isn’t sufficiently trained to know what to monitor for when it comes to phishing emails or other malicious tactics can leave its organisation very exposed.

While social engineering methods pose a major cybersecurity risk for any company, these malicious techniques are theoretically a greater threat to larger organisations with bigger workforces that are harder to train and monitor. Nonetheless, firms of every size and scale should have effective training and processes in place to help mitigate risks.

Combat the criminals

Increasingly sophisticated tools are available to combat the criminal on the street trying to log into, for example, a victim’s online banking or investment portal. A large number of financial services firms now use ‘panic password’ technology to protect their clients, whereby you can enter a special PIN code (i.e. not your actual password) if under duress, that will automatically notify your security teams that you are being coerced. Further to this, the app will appear to continue to work ‘normally’, leading the attacker to believe that they are able to steal funds and transfer them to a particular account.

Another way in which providers can protect clients is via two-factor authentication. Many large financial institutions require some extra information in addition to a password to log on to a service, often a one-time password or PIN that is sent to the customer’s phone via a text message or generated by an app on their smartphone. Other companies offer dedicated security tokens that generate a shortcode on a built-in screen.

Two-factor authentication provides better security than a password alone because even if a hacker can guess a user’s password, they can’t use it unless they have the smartphone or security token as well. This type of technology is relatively low cost, making it perfectly feasible for smaller fintech companies to implement. And in a world that is seeing an alarming rise in the size and scale of cyber attacks, firms must take every step possible to mitigate exposure.

Dmitry Tokarev

Chief Technology Officer, Dolfin

Visa has announced that Revolut is issuing Visa cards to all new customers signing up to its standard prepaid offering. Visa and Revolut have provided contactless Revolut Visa prepaid cards to all 59 Team-GB athletes travelling to PyeongChang as well as the wider Team GB delegation accompanying them.

The card will allow the athletes and staff to complete seamless and secure payments with a simple tap at any contactless-enabled terminal in South Korea and across all the Games venues free of foreign exchange fees.

Suzy Brown, Marketing Director UK & Ireland at Visa, said: “Our exciting relationship with Revolut comes at a time when Visa is making great strides in delivering the next wave of payments innovations for consumers and businesses. It is appropriate then that we have been able to use this partnership to put a Revolut Visa card in the hands of every Team GB athlete and staff member. Visa is accepted in over 46 million merchant locations* worldwide, so the team’s Revolut Visa cards will allow them to make purchases both conveniently and securely when they are in PyeongChang, giving them one less thing to worry about as they aim to do the country proud.”

Launched in July 2015, Revolut now has over one million customers in 30 European countries.

A common goal

“We’re extremely proud to partner with Visa, not least because we share a common goal to use our innovation and technology capabilities to provide a seamless experience for our customers and clients,” said Nikolay Storonsky, Founder and CEO of Revolut. What’s more, with over a million people already signed up to Revolut, we’re very excited that more cardholders will benefit from the control and flexibility we provide.”

Team Visa athletes Elise Christie was among those from Team GB who received the contactless Revolut Visa prepaid cards ahead of travelling to South Korea.

Short-track speed-skater and Team Visa athlete Elise Christie said: “As a professional athlete, I am constantly travelling around the world and it’s easy to take for granted some of the things I have at home. At least while I am in South Korea I can rest assured that I’ll be able to tap to pay with confidence with my Revolut Visa prepaid card, just as I would do when I’m in the UK.”

In addition to providing contactless Revolut Visa prepaid cards to Team GB and as the exclusive payment partner of the Olympic Games, Visa is facilitating and managing the entire payment system infrastructure and network throughout all venues within the Games. This includes more than 1,000 contactless point-of-sale terminals capable of accepting mobile and wearable payments.

* Data provided to Visa by acquiring financial institutions and other third parties.

Outsourcing KYC is a good way for banks to safeguard their continued regulatory compliance and control spiralling costs, explains Toby Tiala, Programme Director, Equiniti KYC Solutions

In a bid to combat money laundering, market manipulation and even terror funding, the rising tide of conduct-based regulations continues to challenge banks globally. The cost of compliance – and non-compliance – is steep. The average bank spends over £40m a year on Know Your Customer (KYC) processes yet, in 2016 alone, bank fines worldwide rose by 68%, to a staggering $42bn.[1]

A double squeeze

Resource stretched mid-sized banks, in particular, are having a tough time. As regulators up the ante they are creating an operating environment increasingly conducive to fines. To cope, banks are expanding their compliance resources to mitigate their risk of transgression. Those with resource limitations are, therefore, the most vulnerable.

They are right to be worried. Since 2008, banks globally have paid a staggering $321bn in fines. Earlier in the decade, high profile money laundering and market manipulation cases caused the level of overall fines to skyrocket. After a brief period of respite (when governments and the Financial Conduct Authority backed off fearing industry suffocation), the fines have been steadily creeping back up. This time, however, big-ticket fines have been replaced by a far higher number of smaller penalties. Put another way, the regulators are now tightening a much finer net than before.

A bank’s ability to profile and identify risky customers and conduct enhanced due diligence (EDD) is critical to ensuring compliance with anti-money laundering (AML) law. This is no trivial task. Major banks are ploughing expertise into their KYC and creating proprietary systems dedicated to meeting the new requirements. Mid-sized banks, however, don’t have this luxury and are challenged by the need to beef up their resources. Applying regulations like AML4, PSD2 and MiFID II to complex legal entities like corporates and trusts is a convoluted business.

New focus

A large proportion of regulatory fines result from high-risk customers slipping through the cracks, usually stemming from ineffective beneficial ownership analysis, customer risk rating or EDD. This is especially common in complex entities with numerous ‘beneficial owners’ – something that has brought these individuals into sharp focus. A beneficial owner in respect of a company is the person or persons who ultimately own or control the corporate entity, directly or indirectly. Conducting KYC to effectively identify high-risk beneficial owners of complex entities is skilled and complicated work, to say the least.

Nowhere can the new focus on beneficial ownership be seen more clearly than in the EU AML4 Directive, which recently came into force, in June 2017. This directive is designed to expose companies with connections to money laundering or terrorism, and decrees that EU member states create and maintain a national register of beneficial owners.

Big impact

The growing focus on beneficial ownership is having a clear impact on banks’ relationships with their trade customers. According to research from the International Chamber of Commerce,[2]  40% of banks globally are actively terminating customer relationships due to the increasing cost or complexity of compliance. What’s more, over 60% report that their trade customers are voluntarily terminating their bank relationships for the same reason. That this could be evidence of the regulations working will be of little comfort to banks that are haemorrhaging revenue as a result.

The UK has already formed its beneficial owners register but caution is advised. The data quality still has room for improvement and the regulations make it clear that sole reliance on any single register may not translate into effective AML controls.  Mistakes – genuine or otherwise – may still occur but automatically checking these new beneficial ownership registers is a clear step forward.

The key for mid-size banks is to zero in on what will both enhance their KYC procedures and deliver clear and rapid visibility of high risk entities. Once established, this will enable them to manage their own risk profile, together with their customer relationships, and minimize the negative impact on their revenues.

Highly complex KYC and EDD activity can severely inhibit the onboarding process for new customers, often causing them to look elsewhere. The deepening of these procedures is making matters worse – it can now take up to two-months to onboard a new client according to Thompson Reuters[3], with complex entities usually taking the most time. Large banks have proprietary systems to accelerate this process but, for mid-sized banks, this is a serious headache; not only does it extend their time-to-revenue from corporate clients, it can also turn them away entirely, and lead them straight into the hands of their larger competitors.

Combine and conquer

For these banks, outsourcing their KYC to a dedicated specialist partner is a compelling solution. These partners have agile, tried and tested KYC systems already in place, are perpetually responsive to the changing regulatory requirements and have highly skilled personnel dedicated to navigating the KYC and EDD challenge in the shortest time possible. Plugging into a KYC-as-a-Service partner enables mid-size banks to seriously punch above their weight, by accelerating their onboarding of new clients to match (and often beat) the capabilities of large banks, dramatically reducing their overall compliance costs and helping them get ahead – and stay ahead – of the constantly shifting regulatory landscape. This, in turn, releases internal resources that can be redirected in support of the bank’s core revenue drivers and day-to-day business management.

It is clear that the regulatory squeeze is set to continue for the foreseeable future. Banks that have the vision and wherewithal to accept this notion and take positive steps to reorganise internally will not only be able to defend their ground against larger competitors, they may even turn KYC into a competitive differentiator.

Specialist outsourcing is fast becoming the norm for a wide variety of core banking processes. Few, however, are able to demonstrate as rapid and tangible benefit as the outsourcing of KYC.

It may be hard to believe, but the 20^th January this year marked one year since Donald Trump’s inauguration. Away from all the media furore surrounding his Presidency to date, one of his less well-publicised reforms to the US tax code is perhaps best summed up by one of his political predecessors.

“You may delay but time will not” – the words of none other than Benjamin Franklin perfectly explain the situation surrounding one particular tax reform currently under review – 871(m). This very specific, not to mention very complicated rule, is a tax on the value of dividends a financial institution receives on a U.S. equity derivatives position.

There is a need for banks to comply with the first part of 871(m) in the here and now, particularly given that there is absolutely no indication that the 871(m) legislation will be dropped. While many banks may be inclined to wait until the outcome of the review, this mentality will only open up a whole world of problems further down the line and is preventing operational teams strategically addressing pressing tax and compliance issues today.

Where it starts to get tricky

The current rule establishes up to a 30% withholding tax on foreign investors on dividend-equivalent payments under equity derivatives, covering a number of product types including swaps, options, futures, MLPs, Structured Notes and convertible debt. And this is where things start to get tricky. A firm’s equity-linked derivative instruments will face a tax withholding if the ratio of change to the fair market value is .08, as of Jan 2019, currently, this is Delta 1, or greater to the corresponding change in the price of its derivative. Banks have no choice but to enhance their systems and processes in order to monitor which equity derivatives underlying constituents fall under 871(m) and know exactly when to calculate and enforce withholding on dividend equivalents.

In order to do this, a careful assessment of intricate calculations based on a set of highly convoluted rules and scenarios needs to be carried out, for example, required Combination Rule logic. In order to do this, firms need to pull together vast amounts of data, ranging from relevant trades (positions alone are insufficient for combination rule tracking), as well as Deltas and Dividends across many instrument types. This would not be so problematic if it was the only issue banks had to contend with. However, with so many other IT initiatives for other Tax and Regulatory mandatory projects also in the works, 871(m) is by no means the only significant compliance requirement on a financial institution’s plate right now.

Ever-changing global tax reforms

Different, albeit similar, challenges also arise from other transaction tax legislation. With this in mind, firms should ensure they minimise multiple interface creation and support costs that result from linking to separate systems managing individual tax rules. Instead, firms should look to feed into a single Transaction Tax system that it is flexible enough to support ever-changing global tax reforms down the line.

It is important to address the 871(m) conundrum now to get ahead of the game. It is not the first, and certainly won’t be the last, transaction tax headache banks are having to overcome under this particular presidential regime. After all, we are in the midst of perhaps the biggest ever shake-up of the US tax code, so who knows what is in store for financial institutions at the end of Trump’s first term.

By Daniel Carpenter, head of regulation at Meritsoft

This is the first in a series of articles on this topic. This article first appeared in the IBSi FinTech Journal February 2018.

The retail banking landscape is becoming increasingly crowded with new offerings from ambitious fintech companies and, increasingly, the Silicon Valley tech giants like Amazon, Facebook and Apple. These players are gaining a growing share of the space between traditional banks and their customers, meaning that banks are now competing with a league of new players.

The British Bankers Association forecasts that by 2020, customers will use their mobile to manage their current account a total of 2.3 billion times a year; more than internet, branch and telephone banking put together.

So, how can retail banks stay competitive? Can they actually learn from the fintech, big tech and social media pioneers that are threatening their central standing as the number one go-to provider of financial services? Could they actually go on to beat them at their own game when it comes to digital customer engagement through banking apps?

The simple answer is, yes. Even despite the fact that competition in the market will intensify once PSD2 comes into force in 2018. The forthcoming regulation will further enable non-banking, data-rich giants like Google and Facebook – as well as innovative fintechs and developers – to lure customers to their own sophisticated and engaging financial management and payment services apps using data from their traditional bank competitors. However, banks still have the competitive edge when it comes to access to customers’ (and financial) data at scale, which they can use to enrich the engagement experience in digital banking.

That said, banks must move swiftly in order to exploit this advantage, while ensuring that they focus on doing so in a sustainable way. To drive long term meaningful engagement with customers, the emphasis must be on using data to enhance user experience. For most banks, this means investing in enriching transaction and financial product data that will enable them to customise their engagement with users. Customers need to feel like their bank understands them and encourages them to form habits that drive real value and impact. They also want to feel that the time they pass on a banking app is time well spent.

In addition to providing a clear and insightful overview of customers personal finances and more advanced features there are many other interesting ways to keep your customers more engaged:

• Proactively feeding insights that inform and educate: this could be in the form of recommending a product or giving financial advice that is relevant to a user.
• The motivation of a card-linked offer – a type of personalised digital coupon via a third party that customers opt in through their bank, which then allows them to earn instant rewards – is an effective way of encouraging users to make small savings on a day-to-day basis.
• Enabling community reinforcement by encouraging users to share progress with peers can also be a helpful way to gamify their saving efforts.

In a post-PSD2 world, banks will no longer be able to rely on the inertia of lifelong customers. 73% of millennials say they are more interested in new financial services offerings from the likes of Amazon and Apple than a traditional bank, so it is essential that banks aim to foster long-term relationships with their customers via their digital platforms. In our lives we have a few critical moments when dealing with money. Our first job, first line of credit, renting and perhaps buying our own place, first child and then maybe investments and considerations for a comfortable retirement. Long-term retention is not just about frequent engagement, but about building up trust and being there for customers with the right advice at the right time in a person’s life, such as:

• Guidance on budgeting during university
• Advice on pensions and savings after securing a first job
• Recommendation or insight that renting can be expensive and perhaps it could make sense to look at buying an apartment in the future

If a bank can show its customers that it knows them well and earn their trust, they’ll be more likely to win customers’ loyalty in the long run.

Personalisation of every customers’ banking experience is tied closely to this idea. Everyone has a different relationship with their finances, yet most banking apps look more or less the same. A bank should provide a digital environment that caters to an individual’s needs and shows them that it understands them. Banking apps should serve different financial behaviours – from those who are more conscientious and “good” with money, to those have lower measures of impulse control and tend to struggle with getting to grips with their finances – and help them develop better financial habits no matter what their personality type.

The countdown to PSD2 is on, and so is the race to meaningfully engage with users between traditional retail banks and their technology rivals. The bank that can offer a data-driven, personalised digital environment that helps people gain the most valuable insight into their current financial situation and motivate them to improve it through a seamless user experience, will be the provider that wins ongoing loyalty from its customers.

The best banking apps should provide a digital environment for continuous dialogue with its customers, that goes beyond the transactional to the emotional. Financially stronger customers will be happier customers, which will, in turn, keep your bank top-of-mind when it comes to other financial services that a customer might need. Get meaningful engagement with customers right, and it might just be the silver bullet for banks when it comes to keeping the big tech challengers at bay.

Bragi Fjalldal,

CMO, VP for Product and Business Development

Meniga

The beginning of the year is so often the time of fresh starts, new initiatives and renewed hope. But given the seismic challenge global banks face to accurately calculate how much capital is needed to shield themselves from sharp price falls, some could be forgiven for abstaining from any New Year vigour.

From January, banks have been given less than two years to iron out all the operational wrinkles (of which there are many) involved in implementing the market risk and regulatory capital rules known as the Fundamental Review of the Trading Book (FRTB). While this may seem like a way off, and while delays might occur, as they often do with regulatory timetables, one look at the scale of the work ahead shortens the timeframe somewhat. From fundamentally reorganising their trading operations to upgrading their technology capabilities and improving procedures – that’s a lot to get done.

No bank wants to start the New Year in 2020 feeling completely overwhelmed, which is why when it comes to FRTB, decisions need to be made on whether to adopt a Standardised Sensitivity-Based Approach (SBA) or Internal Model Approach (IMA). Historically, all firms with trading operations have been required to use their own internal models, due to the fact that the standard approach relied on notional instead of risk sensitivities. The problem is that under FRTB, current internal models won’t be up to scratch when it comes to enforcing the right level of capital to cope with times of stress. And let’s face it, with the geopolitical climate the way it is, trading desks may be in for more than a few bouts of stress throughout 2018.

New management structures

In order to reduce this reliance on internal models, SBA provides a credible alternative for trading desks to operate under a capital regime that is conservative, but not punitive. But those taking the IMA route will need to get approval for individual trading desks, as outlined by the European Banking Authority (EBA) recently. This presents a significant challenge as it places additional responsibility with each desk head for the capital-output, and increases the complexity of bulge bracket institutions running hundreds of trading desks. Each desk will need to put in place a management structure which controls the information driving its internal model, not to mention understand how the output can be used for risk management.

Regardless of the model banks adopt, the standard vs. IMA approach underpinning FRTB brings specific data challenges, both in terms of the volume and granularity of underlying data sets required to run risk and capital calculations, including the model ability of risk factors for IMA. This is why, regardless of the selected approach, the banks that have identified how to get the most out of their internal and external data sets will be best positioned to get their FRTB preparations off to the best possible start.

By Neil Vanlint, Goldensource

Time was when the local bank manager was a pillar of the local community, a figure of solemn solidity; trusted by his customers and potentially known to them all by name. Today, the image of the traditional bank manager seems almost as outdated as that of the village blacksmith. We live in an era of virtual shops, virtual friendships – and even virtual banks. What place has the bank manager in the digital age?

Not much, if banks themselves are to be believed. Earlier this year, Avanade released its latest report into digital disruption in the banking sector, which polled senior IT decision makers from across Europe. The poll found that almost three fifths (59%) plan to eliminate human interaction from banking service in the next 10 years.

Doubtless, some customers will see this as a long-overdue development, used as they are to a new generation of banking services delivered entirely online or through apps. Others may welcome the elimination of lengthy queues in the branch, or the lost lunch breaks spent trying to get through to a customer services representative.

Certainly, a host of digital startups and challenger institutions have begun to revolutionise our relationships with financial services providers, showing that day-to-day banking can be conducted quickly and conveniently through a digital interface. Three-quarters of respondents to our research state that their organisation is concerned about the impact that disruptive competition such as fintech start-ups are going to have on the banking sector.

Improving the customer experience with technology

As these ‘disruptors’ become popular, established banks are scrambling to reinvent themselves. Nine in ten of our respondents say they are investigating how they can use technology to improve the customer experience – an area where traditional banks admit they have fallen far behind their digital-first competitors.

As the banks embrace technology and seek to imitate their online-only and app-based rivals, it’s natural that the traditional bank branch – and the staff within – will become a thing of the past, their solid stone facades providing a perfect setting for a new clutch of trendy wine bars. Just over a quarter of senior IT decision makers from Europe say that an increased focus on digital-centric customer relationships will “inevitably” lead to the closure of some or all branches.

Is the decline of the high street bank and its manager something to be lamented? The banks will point to the immense popularity of digital financial services, and point out that eliminating the cost of maintaining a nationwide branch network can be passed on as savings to customers.

Sleepwalking towards disaster

Or is the banking sector sleepwalking towards a future where they risk sacrificing one of the few remaining unique selling points they have over their digital challengers, and merely attempting to copy what other fintech companies are already on their way to perfecting? Is it wise for them to eliminate the human touch entirely from their operations?

There are two compelling reasons why established banks should think carefully about how they can learn from the new wave of digital upstarts. The first relates to their ability to provide the same slick functionality and reliability for their digital services. Traditional retail banks are based on technology stacks that have been augmented and updated over years, yet still contain a vast amount of legacy systems that are completely unsuited to developing, testing and deploying at speed.

Of course, banks are beginning to realise that they need to replace legacy infrastructure and embrace new technologies such as the cloud. But this process will take some considerable time, during which the fintech challengers will forge further ahead with more sophisticated services, stealing, even more, market share along the way.

The second reason is that physical branches and trained, knowledgeable staff represent a unique and valuable asset – one which banks should think very carefully of consigning to the history books. In spite of the popularity of app-based services, there are some transactions that rely on human interaction – one could even say, on human relationships.

But what is the direction of travel?

Complex, high-value or long-term financial products such as loans, mortgages and investments are obvious areas where humans can make a real difference: for example, by recommending different products, discussing risks and rewards, or even just providing a commiserating explanation for why a customer has been turned down for a loan or credit card.

No-one would claim that banks don’t need to invest in new technology so that they can develop new, more relevant services for their customers. Rather, it is the direction of travel that banks need to examine. Will they profit more from slavishly copying the fintech startups or, what seems more likely, will they do better to reinvent the way they communicate with customers while retaining, where possible, the human touch?

The traditional image of the bank manager might be a thing of the past, but could there be a place for a successor – one armed with an iPad with which to talk customers through their financial future? It makes sense – in fact, you can almost certainly bank on it.

By Paul Bowen, Banking Lead, Avanade

The past five years has seen an incredible rise in awareness around bribery and corruption in both the public and private sectors. While bribery and corruption detection has typically been the purview of whistle-blowers in the finance and audit areas of organisations – the era of whistle-blowers as the only ones exposing these issues is ending. Advanced analytics and other technology processes are lending support to the complicated challenge of following payments and other indicators of corruption.

Since the passage of the UKBA and other updated legislation in nearly 60-plus countries, the world has seen FIFA, Petrobras, Samsung, Shell, Rolls Royce, Unaoil, Embraer, Pfizer, and other organizations exposed for “back room” and other deals to secure multi-million and even billion dollar contracts. In 2017 alone, two companies, Odebrecht and JBS SA have both been fined over $3B a piece for bribes. What does this history of corporate malfeasance mean for the audit function at an organization?

The Audit function, both internal and external, has often been the unsung hero in the identification, investigation and subsequent alerting for many anti-bribery and corruption cases. The primary challenge that audit faces is the complex task of finding these schemes manually. This is where analytics and specialised technology can help significantly.

So how can analytics help the auditor work faster and more accurately? There are three main areas that provide benefits to the audit process:

• Integrating Automation: Auditors primarily rely on their experiences to identify potential ABC issues. With the use of analytics, an organization can depend on sophisticated algorithms to detect potential problem areas by continually looking for schemes within a company’s books.
• Staying Up-to-date: Criminals are always looking for new ways to push their money through the system. Analytics can learn to look for shifting patterns of unusual behaviour by a company’s vendors, customers and even employees and raise an alert to auditors before a problem may have even started.
• Gathering Evidence: Auditors spend significant amounts of time gathering evidence to support a case.  Analytics can significantly reduce this effort by providing continuous monitoring of transactions and quickly bringing back linked transactions related to the case.

Analytics is now viewed as a complimentary tool to an auditor’s function by reducing the time spent identifying problems, and by providing better quality alerts and cases back.

Micah Willbrand

Global head of anti-bribery and corruption solutions

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