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The transparency challenge: providing algorithmic clarity in the financial services sector

By James Loft, Chief Operating Officer, Rainbird

 

As an industry, financial services is amongst the most data-heavy. The information flowing through firms is sensitive, diverse and complex, and covers everything from consumer credit card transactions to mortgage lending and stock price projections. Given its rapid rate of growth, big data has become an integral part of industry strategies to generate new revenue streams, enhance efficiency and improve the customer experience.

 

The result of this has been increased interest and investment in AI technologies. While it will come as little surprise that firms want to get more from their data, they’re also facing tough competition from new challenger banks and fintech companies, many of which are driving change faster than the more traditional players would like.

 

Previously, the sector’s primary use of AI tools has been to transform back-office processes. It’s been a cost-saver rather than a revenue generator, with applications such as robotic process automation (RPA) used to complete simple, repetitive tasks and internal deployment allowing for a conservative approach. But as the market evolves, a second wave of investment is pushing AI closer to front-line services, bringing with it some unique challenges.

 

Protection and regulation

 

Earlier this year, UK Finance and Parker Fitzgerald co-authored a report exploring the power of disruptive technologies and the sustainability challenges facing financial services firms in the digital age.

 

The report takes an in-depth look at the impact of new technologies on the sector, discussing how organisations should handle integration. This is of particular importance to complex financial organisations such as banks, as they are comprised of intricate infrastructures involving complicated risk and compliance processes. All of which are subject to intense scrutiny and regulation.

 

When it comes to AI, one of its biggest benefits is the potential to help firms better match internal policies and procedures with the external demands of regulators – for example, improving the way in which risk within the business is modelled and managed. New data-driven platforms can help firms become more sophisticated in the way they tackle issues such as fraud, identity theft and money laundering, allowing them to provide greater protection to the consumer.

 

Importance of auditable AI

 

In an industry as heavily regulated as financial services, auditable AI is of significant importance to firms. While organisations have been applying AI to business processes, most concerning to regulators is a loss of market transparency.

 

At present, the delivery of services such as mortgage applications and credit scoring though automated advisory models are some way off. This is because deep learning and neural network systems are not yet fully auditable. Their use creates a problem referred to within the technology community as “black box” decision-making.

 

But in regard to important issues relating to consumer protection, such as fraud, firms can deploy auditable automation technologies. These platforms use algorithms to spot suspicious activity, detect patterns and predict outcomes in large data pools. Some of the more advanced solutions are even capable of assessing the anatomy of a fraudulent transaction — they can draw inferences based on the information available, raise questions where the data is incomplete and produce audit trails.

 

What consumers and regulators want is a clear-cut way to interpret AI tools; to ensure data is being used both legally and ethically. So, for financial organisations applying AI-powered solutions, automated technologies that are auditable and explainable when challenged represent a huge step forward when it comes to compliance.

 

To underscore the importance of transparency within the sector, PricewaterhouseCoopers (PWC) has developed a responsible AI framework which outlines best practice principles and provides guidelines for firms to follow.

 

What’s next for AI in financial services?

 

While AI technology is certainly making its presence felt within the sector, adoption rates are still slow. The general feeling is that the industry is feeling its way forward – but change is coming. According to McKinsey, in the next few years AI will complete between 10 and 25 percent of the work across bank functions. Much of this is likely to continue to be in back-office processes, with a more measured increase in consumer-facing products.

 

So, what we’re likely to see as AI continues to reshape the financial services sector is a strategic approach to implementation. A streamlining of internal operations that helps firms match internal processes with external regulation. And the best way for firms to do this is to invest in auditable, transparent and explainable AI-powered solutions.

 

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Finance

HOW ENTERPRISE INFORMATION MANAGEMENT, CLOUD AND ANALYTICS WILL IMPACT FINANCIAL SERVICES IN 2020

Richard Mill, director at Business Systems (UK) Ltd

 

Business Systems’ Will Davenport on which drivers of change will most affect the financial services sector in 2020

 

Recent multi-million pound fines levied on financial services firms such as Tullet Prebon have acted as a wake-up call to City CIOs. That’s because the FCA now includes Voice as a record medium, and is no longer prepared to tolerate delays in locating conversations it is examining.

 

As a direct result, we will witness the formal incorporation of Voice as a peer form of information storage to email, text or internal documentation. That’s not happened to date as it’s historically been an unstructured and fairly unwieldy medium, but modern technology is completely changing that picture.

 

Richard Mill

City firms are starting to manage all their various data assets by using an EIM (Enterprise Information Management) approach. This is a discipline centred on being able to integrate all your data into one structure and applying the right archiving and retrieval workflows across everything you do: we therefore anticipate a great deal of interest in audio-enabled EIM project work in 2020.

 

Cloud sweeps all before it

 

In 2020, the cloud tide will be unstoppable. That’s partly because people are used to accessing applications in the cloud or storing data there, but there’s now going to be a push to use cloud as a way to centralise the bank’s IT systems. The argument as to whether the cloud is insecure has long been settled with City CIOs judging cloud as often safer than their existing on-premise solution.

 

As a result, there’s no reason to continue paying for expensive hardware that requires tending, patching and upgrading. In 2020, look for cloud trading turrets with the back-end being remote and offering porting of voice records into the cloud. That latter step may be a challenge for financial services firms with multiple and legacy voice recording platforms in place, so the cloud move may lead to overdue rationalisation and integration projects.

 

Ultimately, the cloud represents a whole new approach to consuming IT and building apps in the Square Mile. Financial services firms are frustrated with devoting too much resource to old mainframe systems when they would like the modern technology infrastructure in place to support them to be more agile. Cloud will be very liberating for the sector.

 

Strong analytics user cases emerge

 

Analytics technology has evolved and what used to be referred to as dumb data is now a source of business intelligence. Useful data hidden in audio files that used to be discoverable through hours of transcription can now be processed in modern speech analytics systems — making what was originally inert, unstructured data become structured data, which can be easily queried in order to spot patterns and find interesting anomalies.

 

I predict that in the new decade using speech analytics financial services firms will finally gain a richer understanding of what their customers ask for and find problematic, as data mining probes can be run over a vast set of customer interactions.

 

It will mean trading floor managers will have even better detection and forensic tools at their disposal to understand what’s happening, which will be a win-win for customer and regulator alike.

 

In 2020, Voice will be seen an important strategic asset for the financial services firm CIO.

 

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Finance

WILL BLOCKCHAIN REVOLUTIONIZE FINANCE?

By Ken Timsit, ConsenSys

 

Over the last 10 years, researchers, software developers, start-ups, and large companies have been conducting experiments aimed at determining whether networks based on blockchain technology can ultimately – in whole or in part – replace the infrastructure on which financial institutions and capital markets are built.

 

In today’s electronic databases, any information can theoretically be replicated at will. This is why most governments allow only regulated actors to keep records of digitized assets (banks, depositories), to avoid pitfalls such as the execution of misleading transactions or the creation of artificial assets. With blockchain, these pitfalls can be avoided at the source code of the technology, which is available to all members of the network. The creation of Ethereum enabled a more robust blockchain network capable of “smart contracts”, which once programmed, can run automatically without the results being modified or manipulated.

 

Contrary to what some critics argue, the potential of the blockchain is not the creation of a free and unregulated space in which everyone can invent new financial instruments. Rather, the potential lies in creating a much more efficient and globalized commercial and financial infrastructure, in which many layers of control and intermediation are no longer needed as they are replaced by transparent and immutable IT rules that ensure the same risk management functions.

 

For example, bonds are essential financial instruments on which a large part of our economy and savings are based. The issue and exchange of a bond requires the intervention of several dozen financial institutions (issuers, intermediaries and investors). Some regulated players in this intermediary chain exist mainly to ensure that it is possible to know, at any time, who holds each bond, in order to guarantee their rights to its bearers.

 

It is theoretically possible to simplify these stacks of operators by linking them to a global blockchain network, open to all stakeholders in the industry. The blockchain network can thus ensure at any time that the number of outstanding bonds corresponds exactly to the number of bonds issued, and that each exchange transaction is carried out without the risk of default.

 

The blockchain revolution is first and foremost the reduction of costs and delays caused by the current financial infrastructure. The blockchain revolution also creates innovation opportunities for consumers, savers, and investors.

 

 

The Web3 revolution, often used to refer to the blockchain revolution, will be driven by the reduction in transaction costs, allowing the emergence of new peer-to-peer business models that we are not yet able to accurately predict, but which will probably participate in a rebalancing of the relationships between financial institutions and their clients. Some international peer-to-peer payment and loan-to-peer savings investment models are already attracting increasing interest from the most sophisticated consumers.

 

Where are we in 2020?

Today, the blockchain revolution is still in its infancy. Transaction volumes through blockchain networks, public and private, are low compared to those of existing systems. The fixed costs of the technology are still relatively high, and the user experience leaves something to be desired.

 

However, innovations abound. It is already possible for me, from my smartphone, to buy digital assets whose value is equal to about one US dollar, and to lend them in three clicks to other users who will pay me between 1% and 10% per year for this service, depending on the type of platform.

 

The number of large operational business projects is still small, but very promising. Numerous international commodity trading players have joined forces to create Vakt and komgo, two platforms that contribute to a significant simplification of trade and oil financing. Similar and competing projects, Voltron and Marco Polo, are being launched. On the corporate side, the Capbridge 1x platform (Singapore) already allows shares to be traded on an Ethereum blockchain network. Other important projects such as LiquidShare (France), SIX Digital Exchange (Switzerland), Daura (with Deutsche Borse and Swisscom in Switzerland), Synapse (Hong Kong Stock Exchange) are in preparation. The World Bank, Société Générale and Santander have issued bonds on an Ethereum blockchain network. These initiatives are still experimental but have attracted significant interest from financial institutions around the world.

 

And of course, many projects aim to revolutionize global payments by creating digital assets on blockchain networks that are fixed in Euros, U.S. Dollars or other currencies, such as those of the Monetary Authority of Singapore, the South African Reserve Bank, and Union Bank of the Philippines. Since the announcement of the Facebook-initiated Libra project, many governments have expressed concern about the possibility of private companies controlling global payment flows, and have asked their domestic financial institutions to redouble their efforts to explore competing initiatives.

 

All of this is to say that adoption is happening, albeit gradually. The middlemen and intermediaries of the financial world will not be replaced overnight. Moreover, the exact formation or architecture of the new financial system is impossible to predict with accuracy. However, it’s safe to say that blockchain will enable a financial system that is more efficient and yields more value-add to consumers, users, and investors.

 

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