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AI VS. THE CROOKS: CAN MACHINES BEAT THE FRAUDSTERS?

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Konstantin Bodragin, Business Analyst and Digital Marketing Officer at Bruc Bond

 

Over the last couple of decades, AML has taken centre stage in the banking world. Nowadays, AML, shorthand for anti-money laundering, drives strategic planning and organisational structuring. AML concerns keep many a manager up long into the night, as the risks are huge, the penalties for infractions potentially devastating, and the criminals – especially in the era of COVID-19 – ever more enterprising. While the prevention of money laundering is paramount, the weight and risk faced by financial institutions may feel onerous to many. Luckily, the banking landscape is changing rapidly, with automation and AI making the burden significantly lighter to carry.

Banks and financial institutions face a two-pronged problem. On the one hand, the pace of digital payment is growing exponentially. Much of the world’s trade is now conducted through purely digital conduits. But it’s not only the volume of digital payments and users growing, so is the speed of transactions, with instant payment systems being deployed around the world.

The increases in speed and volume are of course good news for the bottom line, but require significant resources to handle effectively. Resources that many in the banking industry are struggling to provide adequately. The industry is shrinking rapidly, with bank closures, mergers & acquisitions, and a massive reduction in the workforce dominating headlines in the last decade. COVID-19 has only accelerated the trend, with bank after bank announcing imminent layoffs and reductions in trading. With the squeeze on resources, many banks would have struggled to keep up with the increased workload regardless of any other constraints, but here they are faced with the second prong: the complexities of AML.

AML regulations have grown thick and convoluted in recent decades, and with penalties as severe as truly massive fines and personal liability for offending compliance officers, it is taken extremely seriously. And for good reason. Fraudulent and criminal activity is costing the global economy many billions each year, with the lighter end of the spectrum meant to merely enrich the perpetrators, while at the other lies terrorist financing and socially damaging criminality. Nevertheless, it is a significant strain on banks’ already constrained resources, directly at odds with the growing pace of global digital trade.

To alleviate these pains, bankers and financiers of all varieties are scrambling to adopt the newest technologies to combat money laundering effectively, efficiently and with minimal costs. For this, AI seems to be the answer, and everybody wants a piece of the action. In 2020, you would struggle to find a fraud prevention company that doesn’t have the words ‘AI’ or ‘machine learning’ somewhere in its description.

Machine learning, one of the tools underpinning the AI fight against fraud, means the use of algorithms and statistical models to allow computers to perform tasks without specific instructions. In the context of payments, this means allowing computers to make decision related to AML compliance with no human intervention. While letting go of control is a scary prospect for many a financier, it may be the only right thing to do for effective AML implementation, both to prevent money-laundering incidents and to reduce the rate of false positives.

Current statistics indicate that for every fraudulent transaction stopped by a bank’s compliance team, some 20 legitimate transactions are prevented from going through by understandably overcautious compliance officers. Not only does this represent a serious hit to the bank’s bottom line, it wastes whatever precious resources are at the team’s disposal.

With current, manual methods, any suspicious transaction needs to be investigated in a process that can take anywhere from an hour to several days or weeks, often requiring the input of numerous team members and stakeholders across several departments. The cumulative resource drain is palpable, and the end result is that transactions are often rejected not due to any illegality, but because it is simpler, quicker and cheaper to do so. It is simply easier to suspect everyone and reject transactions outright. With AI systems, this process can take an entirely different shape.

Machine learning algorithms learn from human behaviour, create and continuously improve user profiles and use this information to validate transactions. Where this technology shines are with onboarding and transaction verification. Or rather, whenever a known user’s identity needs to be verified. A distinct change in a user’s behaviour is serious cause for alarm and indicates potential fraud, with someone pretending to be a user they’re not.

Unfortunately, AI cannot provide everything we want. When it comes to the cross-border and B2B space, AI is more limited in its uses. While businesses demand increasingly faster account opening and onboarding, the entirety of the process can’t be automated. The problem stems from a difficulty in standardising. Variations in geography, type of business, corporate structures, and even the individuals involved mean that a risk profile must be created for each case individually. Even if the processes could be automated to a higher degree, the risk to reward ratio may mean that the investment in AI isn’t sufficiently attractive. Simply put, financial institutions are rightly anxious about an automated system messing up in complex cases that could lead to massive fines or worse.

Moreover, there exists a question of accountability. When a decision is made by AI, how are you then able to find the exact reason behind why a transaction is not stopped when it should have been – other than to blame it on the algorithm? Using AI makes it very difficult to audit payments, as the fuzzy logic of Machine Learning is almost entirely obscure to us humans.

In short, yes, AI and automation are providing a much-needed breathing room for banks, financial institutions and fintechs looking to alleviate some of the AML burden. However, they are no panacea. Real-life, human bankers will stay with us for a while longer. And for those looking for banking with a friendly face, that may not be such a bad thing after all.

 

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Technology

OPTIMISING DIGITAL EXPERIENCE IN AN INTERNET-RELIANT FINANCIAL SECTOR

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Tony Finn, EMEAR Lead, ThousandEyes

 

It would be unfair to say that the events of the last year have started a wave of digital change in the financial services (FS) sector. Speak to any leader within the industry and, although digital transformation looks different to each organisation, it was already high on the business agenda. That said, the pandemic has undoubtedly fast-tracked many FS firms to a complete digital overhaul. In fact, according to data, business adoption of digital services was propelled forward five years in a matter of weeks. For all FS organisations who have made the transition to remote sales and services, it has evoked a re-evaluation of everything from people and property, to technology.

Underpinning it all is the core focus on how to deliver an always on digital experience. Whether you’re a payment provider or stock brokerage, ‘business as usual’ is now dependent on this, without delay or failure.

That said, keeping customers happy and employees productive is increasingly difficult, with remote business adding another layer of complexity to an already intricate puzzle. Providing a good digital experience now relies on an intricate web of Internet, cloud and SaaS services – with many infrastructures lying outside of an organisation’s view and subsequently their control. With remote business here to stay, many are realising the need for increased control over both customers’ online experience and employees’ ability to access now business-critical SaaS applications.

 

Conservative to cutting-edge

According to EY’s UK Banking Cloud Adoption Index, before the pandemic hit, the majority of UK banks (80%) had moved less than 10% of their infrastructure to the cloud. As a highly regulated sector, financial services have traditionally been conservative about diving headfirst into new technologies.

Enter COVID-19. National lockdowns meant that a new approach to technology, particularly in IT, was necessary. With offices and branches closed, never before had FS organisations had to face almost all of their customer base and workforce accessing services and products online – and perhaps most importantly, outside of their IT perimeter.

Over a year has passed and a by-product of the pandemic is that many FS organisations are rethinking their entire business operations. At the end of last year, Capital One became the first major bank to exit all of its data centres, completely overhauling its IT environment in favour of AWS’ public cloud services.

But it’s not just technology choices that have irrevocably changed. Changes are also being made to both organisations’ real estate footprint and remote working policies, with banks already making work-from-home options permanent. As a result of the latter, we’ll see hybrid work strategies emerge with different category employee personas, including field, fixed, and flexi  workers – those who return to the office, those who continue to work remotely and then a combination of both.

 

An IT blindness dilemma

Navigating new employee preferences and consumer expectations for digital banking requires a  complex service delivery ecosystem, hinging on a multitude of external components including public and hybrid cloud, SaaS applications and the Internet. Finding the source of any performance and availability issues amidst a maze of internal and external dependencies is almost an impossible task. However, gaining visibility of what’s occurring within these networks is critical for businesses to achieve that all important user experience.

The challenge is that traditional monitoring tools can’t identify the problem quickly or provide insights into what’s going on outside an organisation’s four digital walls. You certainly can’t fix what you can’t see so, more often than not, IT teams are left scrambling to troubleshoot the issue. What’s more, customers and employees don’t see or appreciate this internal battle so a lack of sight into the root cause often leads to blaming of the product, rather than the network. Not only can a potential outage cause immediate problems in the form of lost employee productivity but it can result in more harmful damage to a FS organisation’s reputation, and ultimately its bottom line.

 

Getting digital experience right in the “next normal”

So, what’s the solution for FS businesses? To optimise digital experience, it’s all about understanding the health of global Internet networks, employee and customer applications, and everything in between. Financial services navigating the digital era post COVID, will need new solutions that provide the reach, visibility, and insight they need to get a holistic view of their entire digital service delivery ecosystem.

End-to-end visibility ensures that issues – happening both in and out of a business’ control – can be quickly pinpointed and mitigated. Sometimes this can take place even before customers are aware or are impacted. This level of visibility empowers IT teams to avoid any finger-pointing and quickly decipher root cause and have purposeful discussions with relevant parties such as service providers. What’s more, there are also advantages to this approach from a network planning perspective – something which many FS organisations will need to include in their IT strategies. Visualisation and scoring of performance across applications, groups of users and locations allows a better understanding of how critical employee services are performing from a benchmark perspective.

The pandemic has undoubtedly turned the financial services sector on its head. With restrictions in the UK slowly easing and optimism around the vaccine rollout, we will see employees return to offices and customers visit branches again this year. That said, some aspects of remote business are here to stay forever and we’re already seeing the impact of this on organisations’ priorities in relation to property, technology and people. Ultimately, success in this new digital-led future will depend on a business’ ability to provide a first-rate digital experience.

 

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Finance

CAN THE CLOUD REVOLUTIONISE FINANCE?

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By Walter Heck, CTO, HeleCloud 

 

The scale of the Cloud revolution that businesses have gone through over the last few years can’t be overstated. Across almost every industry, businesses that have migrated to the Cloud have seen increased revenues, higher productivity and were more prepared to face the challenges of the pandemic than those relying on legacy infrastructure.

However, one industry that has been slow to realise the potential of the Cloud has been finance. PwC found that 81% of banking CEOs were ‘concerned’ about adopting digital tools too quickly however,  even though 91% of hedge fund executives who adopted Cloud solutions stated that their chosen cloud solutions performed ‘better than expected’. Those sitting on the fence when it comes to the cloud can afford to do so no longer. The speed, security and efficiency offered by the cloud is already changing the face of finance, as it has so many industries before it.

 

How Cloud can help Finance?

Compliance continues to be an area that financial institutions of all shapes and sizes are spending an increasing amount of time and money on. The majority (71%) of large firms are cutting the size of their compliance departments while GDPR, Brexit and increased global economic sanctions make even simple tasks regulatory headaches. Compliance is also costing the finance sector more every year. Since the financial crash, Deloitte estimates Deloitte that compliance costs have increased by as much as 60% for retail and consumer banks.

Migrating to the Cloud can solve many of these compliance issues for financial service institutions. For instance, by leveraging modern technologies on the Cloud, such as Artificial Intelligence (AI) and Machine Learning (ML), organisations can ensure financial activities remain compliant with local regulations, no matter where the data is stored. AI can also process this data far quicker and more effectively than humans, ensuring compliance matters are solved quickly and with little room for error.

With companies downsizing their expensive compliance departments, while at the same time regulation increase, the role of Cloud-based automation in compliance is set to become even more important to the financial sector.

Financial institutions that utilise Cloud-based automation allow themselves the peace of mind that they are less likely to be faced with sanctions from regulators for unforeseen or unknown infractions when carrying out day to day activities. With the cost of non-compliance running into the billions every year, neutralising this threat has the potential to save significant amounts of money for the financial institutions who make the move to the Cloud.

 

Security

Data security is vital to the survival of financial institutions. With strict rules in place, and punishments for breaches from regulators and governments increasingly common. As the number of cyber-attacks continues to increase, and costly ransomware continues to put companies out of business, it is imperative that financial institutions take the necessary steps to secure their data.

Traditional on-premises storage and data management solutions of the type utilised by many financial institutions are frequent victims of various types of cyber-attack. Gartner research has shown that up to 60% fewer attacks occur on Cloud structures when compared to on-premises alternatives.

There are many reasons for this but one of the simplest is remote access. An IBM study highlighted that 95% of security failures at companies are due to human error. This can be anything from employees using unapproved third-party applications to being the victim of ‘spill over’ malware for an attack on a different company that bleeds onto another’s on-premises infrastructure. With data being stored and managed remotely, the Cloud offers fewer direct contact points between employees and valuable company data.

However, not all Cloud solutions are created equal and when going alone companies can often find themselves under-utilising the security benefits of the Cloud and leaving themselves vulnerable to threats. Selecting the right Cloud service provider is vital. Storing sensitive data on a Cloud service enabled and managed by an experienced, trustworthy partner, ensures that client and customer data remains safe and accessible without the litany of security issues that come with on-premises infrastructure.

 

Partnering with a Cloud enabler

The Cloud is already revolutionising finance in the way it has so many other industries. Big players such as JP Morgan and Goldman Sachs have started migrating core applications to the Cloud and setting up Cloud hubs in major American cities. Almost half (43%) of financial services decision makers have stated their intent to increase their reliance on the Cloud over the coming year as more and more finance professionals see the benefits that larger competitors are reaping from Cloud migration.

In periods of great change and uncertainty, it can be tempting to bury your head in the sand and stick to the way things are already being done. However, those who ignore the Cloud revolution leave themselves vulnerable in a rapidly changing and unforgiving business climate. An experienced Cloud services partner can help guide a business on its Cloud journey and ensure they receive all the security and productivity benefits the Cloud offers. With more and more major players moving processes and workflows onto the Cloud, it is up to each finance decision maker to change now, or be overtaken by their forward looking and savvy competitors.

 

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