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BANKING REGULATORY COMPLIANCE NEED NOT BE OVER-COMPLICATED

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Joe DiRollo, Founder and CEO, ALMIS International

 

Central banks around the world are assessing and developing improved ways to receive and analyse data from banks.  Since the 2008 banking crisis, there has been a tsunami of regulations and reporting requirements for Banks and, bluntly, the banking industry has struggled to keep up with these frequent and ever more complex requirements.

The Bank of England and Financial Conduct Authority, for example, embarked on a significant project to transform data collection from the financial sector, the aims of the project include.

  • Having a common data standard for the industry
  • Modernising the reporting instructions
  • integrating the reporting approach

Joe DiRollo

Banks have to remain transformative in terms of their reporting procedures, however many continue to rely on spreadsheets and manual processes in order to pull together the information necessary to satisfy the Board and Regulators.

They struggle to meet the deadlines and internal audit reports worry Executives, Boards and Regulators and highlight the necessity of a modern and holistic approach. The stark reality is that this is overdue, is becoming the fact it is overdue is almost universally recognised.

In its simplest form rather than sending individual completed reports on say Credit Risk by Country – firms will send the dataset in a more granular form so that risk metrics and analysis can be computed, from the institution’s perspective its one detailed submission of core data.  Whilst regulators gain access to market wide and individual firm analytical capabilities which allows far greater analysis.

In my opinion, these aims are laudable and exactly what is needed, whilst acknowledging that there is real difficulty in delivering this.

Numerous legacy systems coupled with the simple fact there is no ‘one size fits all’ and a mixture of simple and highly complex business models, instruments, and balance sheets.  Standardisation whilst achieving the requisite granularity is a very difficult undertaking, perhaps part of the reason that no one has succeeded.

Following the aforementioned crisis, and BASEL and CRR reforms, we’re now seeing a massive uptake in the use of our technology to provide the necessary answers to these ongoing and increasing demands. Indeed, ALMIS is carrying out comprehensive groundwork to grow in line with the complexity of these regulatory demands.

The enhanced data model has been engineered to facilitate both current and expected future requirements for Regulatory Reporting and Middle Office plus has been developed to wrap around the data model and help institutions bring in and manipulate data within the software and remove the need for manual or external data manipulation.

Building on a heritage of traditional asset liability management protocols, ALMIS Middle Office + works by bringing in detailed end of day data and ensuring that the truth data reflects the full balance sheet, so you have the whole truth. The centre piece of this is the data model of course and how it is organised.

Lending, Deposits and Treasury trades should not be normalised because they are all hugely different business activities.  Each therefore has its own data elements or table.  Liabilities can be secured against assets, so these links are inherent to the model. Collateral is attached to assets with its own dimension elements.  The data model reflects the need for a customer view across all accounts and trades, and a product or instrument view.

They key here is to take a complete snapshot of all relevant on and off-balance sheet data as this ensures the information is used both in the Regulatory Reporting and the firms internal ALM analysis is complete, and it also builds validation into the process by design.

Crucially reporting to the Regulator is not a Silo activity. The same data, data model and tools are used for all the necessary Board and Committee analytics ensuring the senior management and the Regulators views are aligned and the information they receive is both correct and consistent.

In conclusion, banks around the world have been critical of regulators constant demands for complex and changing reporting requirements and often do not see how providing all this information, at a high cost to themselves, provides much any benefit to them or the industry.

Regulators are actively responding to this and looking to improve and modernise how reports and data are collected.  Currently these projects are at a very early stage, and no one yet has found the answer.

However, to solve this, we believe regulators must start looking at how to address this for the less complex institutions and build a solution from there.  Solve and prove it for the simplest firms and then scale upwards.

 

Banking

COMBINED RISE OF M&A AND CYBER RISK CREATES STORMY SEAS FOR INVESTORS

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UK organisations carrying out merger and acquisition (M&A) activities must improve pre-acquisition due diligence of software vulnerabilities

By Philippe Thomas, CEO at Vaultinum

At present, the UK is seeing a sharp rise in M&As. Indeed, in the first quarter of 2021, the UK saw a £1.1 billion increase in domestic M&As when compared with the same period in 2020 (Office for National Statistics). This trend is set to continue, with 57% of UK executives reporting that their companies intend to pursue M&As in the next 12 months, and 65% of these respondents focusing on cross-border acquisitions (EY). As such, UK businesses have given a clear vote of confidence in moving forward with M&As, making them a focal point for accelerated organisational growth and development.

Philippe Thomas

Traditionally, organisations and investors have conducted due diligence covering financial, legal, operations, and human resources. Comprehensive software due diligence is not always carried out systematically, which has significant adverse consequences given that a company’s technology is increasingly its primary asset. As non-tech organisations use more and more tech for their day-to-day operations, and as the number of tech-forward companies grow, new issues have arisen which are overlooked in traditional due diligence.

 

A crucial time for tech security

Data breaches during M&As have become infamous during the last few years, with more than 1 in 3 executives surveyed by IBM reporting data breaches associated with M&A activity during the period of integration. This figure could be set to increase, as statistics highlight that cyber-attacks are rising sharply in the UK. According to Sophos data, 51% of UK organisations were affected by ransomware attacks in 2020, with criminals successfully encrypting data in 73% of these attacks. Cybercriminals are increasingly targeting organisations in ransomware attacks with the eventual goal of large-scale business interruption. Carrying out comprehensive due diligence that assesses both software and source code during the pre-acquisition phase enables the early identification of data breach risks, providing the acquirer with a full view of the financial and legal consequences at this stage of negotiations.

Acquiring or merging with a secondary company that has hidden data vulnerabilities can impact the primary company’s business operations, investor relations and reputation. The most well-publicised example of this occurred in 2017, when Verizon revealed a pre-merger data breach at Yahoo!. During negotiations of the merger, it was revealed that Yahoo! had experienced a data breach during which a hacker stole the personal data of at least 500 million users, followed by a second data breach in which 1 billion accounts were compromised and users’ personal information and login credentials stolen. In this instance, Verizon had done their due diligence, and were able to make an informed decision about going ahead with the deal. If Verizon had not carried out any tech due diligence, and this data breach had not been revealed during the negotiations, Verizon could have overpaid for Yahoo!, as well as experiencing long-term legal and reputational damage. Instead, both companies understood the liabilities before entering into an agreement.

Other companies have not been so lucky. In 2016, Marriott International purchased Starwood Hotels & Resorts for $13.3 billion. Two years following the merger, Marriot revealed a huge data breach in Starwood’s reservation system that occurred pre-merger in 2014, in which 400 million guest records were exposed through a security flaw. This resulted in a $123 million GDPR fine by Britain’s Information Commissioner’s Office, as well as reputational damage for both Marriott and Starwood. This is an example of an instance in which insufficient software due diligence prior to the merger has catastrophic consequences for both the acquirer and the target company later down the line.

Software due diligence highlights risks and weaknesses in digital assets. This can bring to light data security issues, as well as other vulnerabilities such as intellectual property risks linked to the use of open-source software (OSS) licences and maintainability complications. All of these risks can affect the overall quality of the asset, and thus its value for the acquirer and so uncovering them through comprehensive due diligence at the pre-acquisition stage is essential.

 

Understanding open-source software (OSS)

For any M&A activity in which the target company’s software is a significant asset of the deal, which is now the case in most start-ups which have AI or algorithms at the heart of their offer, the issues do not end with hidden data vulnerabilities. Today, software developers often rely on public code repositories available on websites like GitHub or Stack Exchange, as OSS has a number of significant benefits, most notably that it appears to be free at the point of use. However, many OSS licences are often offered subject to conditional restrictions. When using OSS to create derivative products or linking source code to OSS, the integrated product becomes subject to these conditional restrictions, which can include making all or part of the code public or paying a fee for its use. In other words, a company may not have full rights to their product or software.

This is problematic for any tech-enabled company in general, but can be uniquely catastrophic during M&As. If acquirers carry out comprehensive due diligence in the pre-acquisition phase and discover any such OSS embedded in the target’s software, they may walk away from the deal entirely, or at the very least adjust its value and/or terms. If acquirers do not implement comprehensive due diligence, they become liable for the target’s previous use of OSS, and any terms relating to its licencing.

 

Algorithms add robustness to tech audits

Carrying out comprehensive software due diligence is essential during the pre-acquisition phase, to avoid the aforementioned issues associated with data breaches and software licencing. Today’s advances in AI technology enable these audits to be thorough, analysing every line of code to identify possible cyber vulnerabilities, intellectual property issues (usually linked with the use of open-source code) and maintainability risks.  These methods enrich traditional tech due diligence, by making audits more objective and less susceptible to human error.

Ultimately, this approach protects the acquirer’s reputation, ensures business continuity, and helps avoid possible legal liability for the target’s previous vulnerabilities.

 

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Banking

THE GROWTH OF DIGITAL BANKING: WHY COLLABORATING WITH FINTECHS IS CRUCIAL TO ADAPT TO CUSTOMER DEMANDS IN LIGHT OF THE PANDEMIC

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The growing customer demand for a seamless digital banking experience looks set to transform how the entire banking industry operates. Traditional banks have been left playing catch up with the emergence of new fintech players and challenger banks. The demand for slick digitally finance solutions is led by the digital native generations, the millennials and Gen Z. However, the coronavirus pandemic accelerated the uptake of online shopping and remote working for whole swathes of the population. Even the older generations have been left wondering why accessing banking services online remains so cumbersome.

Consumers’ growing desire to access financial services through digital channels has already led to a surge in various new banking technologies which are reconceptualising the banking industry. Consumers have rapidly moved to adopt payment solutions such as those offered by apps like Revolut.

Manoj Mistry

Retail banks continue to launch platforms in the Banking as a Service (BaaS) space, in an effort to remain competitive. An example of this in the UK is how NeoBank (Starling) used to only offer business to consumer (B2C) retail banking services. However, once it launched its BaaS platform, Starling was able to rapidly diversify to include consumer services.

New technologies like blockchain and artificial intelligence (AI) continue to evolve, and look set to have an enormous impact on banking over the next three to five years. The type of cryptocurrencies that we have seen to date look set to be far more tightly regulated, given significant governmental concerns about their potential for misuse in cybercrime and money laundering.

In the blockchain space, the transformative development which will accelerate the rise of digital finance is the advent of central bank-backed digital currencies. The US Treasury has described the creation of a digital dollar as a high priority project. China is already trialling its digital Yuan. Meanwhile, the ECB is actively pursuing its plans to launch a digital Euro. The launch of stable, highly secure digital currencies, underpinned by major central banks, looks set to ensure that digital finance will permeate every area of our lives in the not too distant future.

How we use digital finance is also set to change radically. We are used to seeing new technology emerge from Silicon Valley. However, an analysis by KPMG Australia suggests that a new breed of apps which prefigures the future of digital finance has already emerged in the East. The report notes that “super apps” are “already encroaching on traditional financial services territory”.

Super apps are defined as apps which “essentially serve as a single portal to a wide range of virtual products and services. The most sophisticated apps – like WeChat and Alipay in China – bundle together online messaging (similar to WhatsApp), social media (similar to Facebook), marketplaces (like eBay) and services (like Uber). One app, one sign-in, one user experience – for virtually any product or service a customer may want or need.

“Due in large part to their versatility, super apps have quickly become ingrained into users’ daily lives. It is not unusual for a WeChat user in China to set up a date with a friend via instant messaging, make dinner reservations, book movie tickets, order a taxi and pay for every transaction along the way, all using one single app.”

We are already beginning to see trends in this direction in the Western world, with Facebook launching a marketplace and even a dating service within its social network. Facebook also attempted to launch its own digital currency, Libra, but this move stalled when it ran into significant governmental opposition. However, Facebook hasn’t given up, and it is determinedly pursuing the launch of a revamped stablecoin, Diem, which has been redesigned to address regulatory concerns.

A group of Citi analysts recently wrote an interesting research paper, which predicts that “the story of digital money in the 2020s will be the growth of tokenised money”. Noting that both Big Tech and Central Banks “are building new payment formats and rails,” they say that “while stablecoins such as Diem await regulatory approval, they could benefit from the huge network effects of their Big Tech sponsors. In fact, Diem could be an effective tokenised payment format inside the Facebook universe.” The paper predicts that “Stablecoins, such as Diem, could benefit from the huge network effects of their Big Tech sponsors”. With 3.3 billion monthly users, Facebook certainly has remarkable global reach.

The idea of an integrated tech platform which enables people to interact and purchase goods and services – including financial services – is now being pursued by many major players.

Amazon has long been rumoured to be planning to launch its own bank. Yet, research by CB Insights concludes that, “from payments and lending to insurance and checking accounts, Amazon is attacking financial services from every angle without even applying to be a conventional bank.” This is perhaps not surprising. After all, tech companies rarely replicate existing models. They usually find disruptive new ways to achieve the outcomes that consumers want. Even the messaging service, WhatsApp, has recently moved into financial services with the launch of WhatsApp Pay.

As money becomes digitised and tokenised and ever more areas of our lives move online, the distinction between an online marketplace, a social network and a financial services provider will continue to blur. How traditional financial services companies react to these developments remains to be seen. Some may partner with tech companies in creating new services. For example, Visa and Mastercard were involved with Facebook’s Libra stablecoin project. Visa also responded to the popularity of peer to peer payment services such as Revolut by launching Visa Direct, which enables users to make payments directly to another account in 30 minutes. Most major banks now support Apple Pay, which enables users to authorise payment by scanning their face or thumb.

Banks can also collaborate with tech companies in terms of data sharing, in order to better understand what their customers want. A company like Amazon knows what books people like, what music they listen to and what they purchase. By combining such data with wider financial data, remarkably predictive Big Data models could be created. Some banks might increasingly pursue opportunities to monetise data, while others might make privacy their unique selling point.

The banking sector fundamentally deals with money. Yet, the very nature of money is set to change, as it becomes digitised. Banks are no longer merely competing with each other, but they are both competing and collaborating with tech companies and social networks. Looking ahead, the only certainty we have is that we are in for a period of remarkable change.

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