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AI IS DRIVING A NEW FRONTIER IN BANKING – BUT THIS REVOLUTION IS EXPLAINABLE

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By Hani Hargras, Chief Science Officer, Temenos

 

During the second half of the twentieth century, Artificial Intelligence (AI) was an idea that only featured in science fiction movies. Such films often depicted a future dystopia where humanity struggles at the whim of advancing technology. However, today we find ourselves living in a new frontier defined by data and automation. Central to this is AI, which is playing a major role across many sectors.

A report from Microsoft and EY analysing the outlook for AI in 2019 and beyond, stated that “65% of organisations in Europe expect AI to have a high or a very high impact on the core business.” In the banking and financial services industries, AI has already begun to vastly improve the customer experience. Important actions are being undertaken using AI on credit risk, wealth management and even financial crime risk assessments. Other applications include robo-advisory, intelligent pricing, product recommendation, investment services and debt-collection.

The latest Economist Intelligence Unit (EIU) report carried out on the behalf of Temenos, found that 77% of banking executives believe that winners and losers within the industry will be determined by how they embrace AI.

Rarely, if ever, will banks have faced the kind of immense strain than during this pandemic. They were already under pressure transitioning their operations to be compliant with social distancing guidelines and are now having to cope with record levels of demand from their customers. Online banking has seen a huge spike in activity following the closure of bank branches during lockdown and banks are also having to lend in unusual circumstances, requiring them to manage the twin pressures of increasing arrears and political pressure not to trigger defaults.

Hani Hagras

Banks must have the ability to adapt in order to deliver whatever is required to support the financial health of their customers. They need to quickly scale up operations and develop new digital products and processes in highly compressed timeframes. To cope with the huge demand for Bounce Back Loans in the UK, lenders need to provide simplified digital self-service user journeys.

To do this, they must urgently deploy technology that can support greater automation and efficiency and improve productivity. This technology not only exists but is already successfully being used to solve problems.

AI will enable banks to significantly accelerate digital onboarding, conduct eligibility checks and process loan applications. AI can centralise and enforce policy rules to ensure decisions are based on bank-specified criteria. This consistency in decision-making is hugely important in the current context as it reduces the need for manual intervention, which can slow down the processing of the huge volumes of loan applications. This technology can also play a key role in rapidly accelerating the onboarding of customers to digital banking services.

However, it must be recognised that the adoption of AI across business sectors has not come without its challenges. In a recent forecast, Forrester predicted a rising demand for transparent and easily understandable AI models, stating that “45% of AI decision makers say trusting the AI system is either challenging or very challenging.”

With the surge in AI usage will come much greater regulatory oversight. Transparency must be a key tenet of AI regulation and models that offer limited visibility and that don’t protect against bias should be regulated out.

Just as it’s important to be able to look under the hood of a car and understand how it works, so should banks be able to look at how decisions are made and understand how they are reached. Yet, transparency is not possible with traditional ‘Opaque box’ AI.

True ‘Transparent box’ explainable AI systems enable merging data based and human expert knowledge to generate models that are fair, safe, unbiased and highly accurate. XAI systems are highly transparent models, which could be easily analysed, understood and augmented by the business users. The XAI models can explain, in human language, how an AI decision has been made. Crucially, they do not solely rely on data, but can be elevated and augmented by human intelligence. This technology will be crucial in helping bank’s build trust with customers and regulators and identify issues as they arise.

The global pandemic is once in a century event and has demonstrated how indispensable agile and scalable technology is in responding to a crisis. With pressure mounting on the sector, the deployment of XAI technologies is key to enabling banks to help secure the financial wellbeing of its customers. This is a once-in-a-lifetime opportunity for banks to make the difference between a huge number of businesses staying afloat or going under

Finance

A DATA-CENTRIC APPROACH TO AUTHORISING CUSTOMERS’ ONLINE TRANSACTIONS

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By

Shagun Varshney, Signifyd Senior Product Manager, Payment Solutions

 

As online shopping continues to grow, so too does the level of fraudulent orders. But often, the most costly and damaging part of fraud for merchants is not the fraud itself, but the valid customer orders that are mistaken for fraud and are rejected by the merchant or bank – research suggests around 30% of declined orders are false declines.

Merchants are constantly battling a double-edged sword between allowing orders to be processed that run the risk of being fraudulent, or declining orders that seem suspicious and end up damaging relationships with genuine customers. In the peak season, this becomes even more challenging as order volumes increase, along with fraudulent activity.

Against a backdrop of upcoming SCA regulation changes, supply chain issues and increasing customer demand in the lead up to Christmas, retailers can’t afford to lose transactions and damage relationships with customers.

This perfect storm calls for a new approach to risk management, where retail fraud teams focus on optimising business. For instance, bringing value by maximising the number of orders approved and facilitating the newer ecommerce channels, such as click-and-collect.

 

How the payment ecosystem works

Online payments have become so lightning-quick and seamless (for the most part) that it can be surprising to learn how many hoops a transaction has to jump through in order to be authorised and settled. As soon as a customer clicks “buy,”  a whole series of digital cogs begin to turn, each of which can put the brakes on a transaction. It begins with the payment gateway:

Payment gateway: Payment gateways are the card machines of the internet: when a customer clicks “buy” in your online store, they are taken to a payment gateway to enter their payment details. The payment gateway moves the cardholder and transaction information among the different players. And it lets the customer know whether the purchase has been authorised.

Acquirer: A bank that works for the merchant, processing credit card transactions by routing them through the networks run by card companies such as Mastercard or Visa to the cardholder’s bank, or issuer. Acquirers sometimes look to third parties to help with processing payments.

Credit card network: The acquiring bank and issuing bank communicate with one another via a credit card network. Visa and Mastercard are examples of credit card networks.

During a transaction, the credit card network will relay authorisation and settlement messages between the acquiring and issuing banks, charging a small fee to each. Some credit card networks are also issuing banks (e.g. American Express) but most are not.

Issuer: The issuing bank is the financial institution which provides the customer’s bank account or credit card. An issuing processor sits in front of the issuing bank and handles authorisation requests from the credit card network on its behalf. It then authorises and settles the transaction.

 

Why false declines occur

Banks and payment companies decline payments for a host of reasons, some of them quite reasonable. Most often a payment is turned down because a card’s credit limit isn’t sufficient to make the purchase. Transactions are also scotched if card information is entered incorrectly — say the CVV code offered is wrong — or if the card or information provided is outdated.

Payments are also declined to protect both the consumer and the merchant. If a bank believes a lost or stolen card is being used it will decline the transaction. Technical hiccups, such as an outage at the issuing banks can also cause a decline.

While protecting customers and merchants is all well and good, problems arise when banks mistake a good order for a fraudulent one. These payment rejections are referred to as false declines.

The good news is the majority of declines are not due to nefarious activity and are therefore recoverable. But maximising your authorisation rate – i.e. the percentage of customer payments you take which are approved and settled – can still be a real balancing act.

 

A data-centric approach to improving authorisation rates

  1. Provide more data. Large issuers such as Capital One and Amex have reported that submitting additional data from the merchant-side led to a 1% to 3% increase in authorisation rates and significantly reduced false declines. Providing more merchant-side data to issuer banks and payments companies gives them more evidence a transaction is legitimate.
  2. Use quality fraud tools. Effectively managing online fraud carries benefits beyond the obvious. Yes, merchants lose less revenue through bad orders and are able to confidently ship more good orders. And they also build a reputation with the financial institutions. Retailers that turn to highly effective machine learning and artificial intelligence driven solutions send cleaner traffic to the banks reinforcing the idea that their orders are highly likely to be legitimate. Conversely, retailers that send a relatively high percentage of fraudulent transactions to banks, will find those banks broadening the set of transactions they decline. It becomes something of a death spiral for revenue.
  3. Authenticate payments when required. Besides deploying innovative fraud solutions, European merchants need to be deliberate in the ways they authenticate customers in the era of PSD2 and strong customer authentication (SCA). The key to success rests in intelligently managing exemptions and exclusions when deciding the most efficient route meeting new payment regulations. Wisely relying on exemptions will allow a significant percentage of transactions to be exempted from SCA and will ensure that each individual customer is receiving the best customer experience available. Properly deploying exemptions and exclusion — which apply, for instance, based on the order value, the origin of the transaction, and a merchant’s fraud history — is a complicated prospect, but an ecosystem of providers has grown up to help with the challenge. Adding intelligent exemption tools goes hand-in-hand with relying on robust fraud protection solutions. Establishing a record of sending clean transactions to the banks will encourage them to become less conservative in authorising orders. High authorisation rates begetting high authorisation rates becomes a virtuous cycle.
  4. Accept digital wallets. Be discerning when selecting a payment service provider. For instance, be sure you’re able to accept Apple Pay, Google Pay and other digital wallets, as they require two-factor authentication and are more likely to pass fraud filters.
  5. Enable card account updater. Many payment processors can automatically update your customer’s card details if they expire or are renewed. Check with your processor to make sure they offer an account updater, and that it’s enabled.
  6. Payment Routing. Payment routing solutions analyse your particular payment ecosystem and use historical data to determine the transaction route which is most likely to result in a successful authorisation. This can be especially useful if your customers are from all over the world, and not based in just one country.

Being deliberate and thoughtful when it comes to building your authorisation optimisation strategy can make a real difference in the conversions you see every day. As importantly, taking the steps to increase authorisation provides your customers with a better shopping experience and a bigger incentive to visit your ecommerce store again and again.

 

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Banking

PRIVATE BLOCKCHAINS IN FINANCIAL SERVICES

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Jonas Lundqvist, CEO and founder of Haidrun

Blockchain is well known as the technology that has made possible the introduction of Bitcoin, Ether and thousands of other cryptocurrencies, making it one of the most important innovations in finance today. It has however also created the misconception that cryptocurrency and blockchain must always co-exist, although this is simply not the case. Several banks and insurance companies, such as JP Morgan and MetLife, are using their own private blockchains, without cryptocurrencies, to simplify, streamline and verify transactions and contracts.

 

What is a private blockchain?

Jonas Lundqvis

Fundamentally, blockchain technology delivers a distributed database that provides a single time-stamped version of the truth. It then uses mathematics and cryptography to provide trust and security – rather than through third parties – and relies on an accessible and open user structure to confirm all is well. A private blockchain is a type of database where a single authority or organisation ultimately retains control and no one can enter this type of network without proper authentication. Private blockchains are, by definition, ‘permissioned’ and are more suited to enterprises for reasons of performance, accountability and cost. For many enterprises, using private blockchains is the preferred option to safeguard the company’s sensitive information and they are used for reasons of privacy, where it is not appropriate to allow every participant full access to the entire contents of the database.

The objective of a private blockchain is to empower and support the business rather than the individual users, retaining some overall control to improve privacy and eliminate any of the illicit activities often associated with public blockchains and cryptocurrencies. Enterprises are frequently required to demonstrate full accountability on the running and operation of their systems and processes and private blockchains can help achieve this. They provide a greater degree of demonstrable governance and regulation, often determined and set by external administrators in line with their industry’s regulatory codes.

Importantly, private blockchains do not need to use cryptocurrencies or native tokens to process transactions and any association with cryptocurrencies, good or bad, is not a required part of the private solution.

 

Blockchain for Financial services

First and foremost, Blockchain is a database, comparable to a general ledger used by accountants to record transactions and payments. In blockchain, data is recorded chronologically and it can digitally log the entire life cycle of any transaction. Recording this automatically means blockchain technology vastly improves the efficiency of the process, reducing the time and cost needed to keep accurate records.

Blockchains are decentralised, which means each transaction, or multiple transactions in a block, is recorded via independent nodes at the same time. Nodes can be on a smartphone, computer or a server, providing a complete financial record of every transaction and offering significant protection from fraud.

Blockchains are also immutable, meaning the blocks cannot be altered in any way and no single node has control of the chain.  Any changes that are attempted are immediately seen and corrected using a consensus mechanism across all the other nodes. Hacking the chain is not mathematically impossible but it is essentially economically unfeasible to change more than half the blocks to achieve the required 51% attack.

The improved security and automated implementation offered by blockchain means the use of third-party intermediaries to validate transactions can be reduced or even eliminated altogether. Every financial transaction requires validation from simple merchant shopping to investment banking and they all need paying for ‘touching’ the transaction. This is the area where many of the disruptors and innovators in fintech believe huge cost and time savings can be made.

 

Payment processing

Payments is an area of finance for which blockchain technology is ideally suited – tracking and verifying account payables/receivables, using smart contracts to automate processes and remove third parties, whilst practically eliminating duplications and errors. However, early trials on public blockchains involved cryptocurrencies, which proved to be too slow and volatile for any practical solution. The increasing value of Bitcoin for example has meant the transaction fee – payable in coins – has almost become prohibitive. Merchants and their banks were also very concerned about value swings during the transaction processing as well as the privacy and transparency needed for fraud and money laundering prevention required for B2B transactions.

The conclusion was that fiat currency or credit were still the better solutions for these transactions. However, a permissioned blockchain solution without any tokens but with its significantly higher transactions per second (TPS) speed, privacy and adherence to regulatory frameworks can provide the ideal solution. Essentially, blockchain provides immutable verification that the transaction has taken place and confirmed by each party.  For merchants and banks, the technology makes it safer, quicker and cheaper whilst leveraging the best elements of existing systems and processes and upgrading areas where step change improvements can be made.

With distributed, immutable features providing improved privacy, accuracy and security, it would be difficult to find a use case in financial services that would not benefit from adopting blockchain. Banking, lending, insurance, trade finance and asset management would all benefit from using the technology, which the finance sector acknowledges will save billions of Euros for banks and major financial institutions over the next decade.

www.haidrun.com

After spending 27 years in the software industry, Jonas Lundqvist founded Haidrun to help businesses meet the increased demands on efficiency and security whilst providing new revenue producing opportunities by using private blockchain technology.

 

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