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Getting AI and machine learning right; The new banking toolkit

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Alok Rustagi, Vice President, Data & Analytics, EXL

 

We’ve all seen the recent hype surrounding ChatGPT and the potential artificial intelligence has to transform our daily lives. But increasingly, businesses (and financial services in particular) are debating how similar algorithms could be used in more professional settings.

Machine learning and AI technology have the potential to be huge differentiators for banks – both operationally, and the impact on the bottom line – but they need large amounts of data if they’re to be effective. With interactions moving increasingly online, paired with large-scale modernisation efforts, banks are getting access to a wealth of data on their customers, but with legacy technology still holding many bigger banks back, fast-growing fintechs are leveraging this opportunity better. To bridge this gap, high street banks are investing millions to build machine learning and artificial intelligence (AI) capabilities, and to modernise their data assets and platforms. However, there are many considerations before AI and machine learning can become mainstream for retail lending decisioning – especially given the attention badly executed AI programs that are creating bias have received recently.

Using AI to help customers whilst remaining compliant

Alok Rustagi

Unlocking value from data requires sophisticated analytics capabilities. Only proper tools and algorithms can trawl through a sea of data to pull only the actionable insights.

Building these capabilities from scratch is a huge challenge for many financial institutions already struggling with legacy technology or burdensome compliance requirements. A more manageable way to coordinate a digital transition is to look to technologies that can be plugged into a bank’s existing framework, at least in a transition phase.

AI-based solutions can be implemented to collate and interpret a bank’s customer data to present back a comprehensive view of its customers, on an individual basis. Rich insights can be drawn from payments data and bank account transactions to provide a customer’s complete financial profile. Detailed customer profiles can arm businesses with the insights they need to not only create tailored products for their customers, but also means they stay on the right side of regulation that’s increasingly focused on customer outcomes – the FCA’s Customer Duty legislation for example.

This also allows banks to support their customers in the best possible manner. In the face of a cost-of-living crisis, new predictive machine learning models will allow banks to prevent consumers running into major financial trouble. For example, by anticipating financial distress and intervening prior to a customer defaulting on a payment or falling into debt.

Using machine learning responsibly

In partnership with developments in AI, machine learning has embedded itself across the banking industry. From automating back-office processes, to improving accuracy, to managing and reducing fraud, it has already proved its potential to transform operations.

This ultimately puts banks and other financial institutions in a much stronger position to add value across the customer lifecycle by making sense of consumer needs, product usage, and credit profile. From risk underwriting controls and models to improving marketing effectiveness, AI solutions can transform a business’s efficiency.

But some thorny questions remain about how best to adopt machine learning for more complex processes and journeys – for example, approving applications, gauging risk, or making credit limit decisions. There’s a risk that without proper frameworks and governance structures, issues of inherent bias may creep in, and a bank’s ability to account for uncertainty or explain the rationale behind AI decisions might be compromised.

To balance this risk, data input must be qualified to reduce that risk, and machine learning must go hand in hand with cutting edge analytics and intelligence capabilities. This will allow banks to segment customers and respond to their specific needs and circumstances accordingly and without bias.

Partnering with the experts

Financial institutions taking their first steps on the digital transformation journey would do well to partner with technology and analytics experts, in order to harness the full power of machine learning and AI whilst navigating the various possible road bumps. Experienced partners will also form an objective and holistic view of the current technology infrastructure, which can be difficult to do from within the organisation for a variety of reasons. They can then support the development of a roadmap with clearly articulated deliverables around implementation, monitoring, auditing and optimisation.

This ultimately helps banks and financial institutions to harness machine learning and AI to deliver a range of benefits while protecting them from issues that might inadvertently arise. This also means peace of mind for finance leaders who might be reticent to adopt machine learning for more complex journeys or processes.

The industry is storming towards digitisation whether financial institutions choose to keep up or not. The best advice is simple; find a credible, knowledgeable partner and allow them to light the way to an efficient and responsible data and analytics strategy in 2023.

Banking

Will ‘Britcoin’ change the way we bank?

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The Treasury and Bank of England recently announced a state-backed digital pound is likely to be launched in the UK later this decade, following the popularity of cryptocurrencies. However, the ‘Britcoin’ will be backed by the central bank, ensuring the digital pound will be much less volatile than its sister, cryptocurrency. Could a digital pound backed by the central bank be the answer to utilising technological developments in the finance system for the better?

Ross Thompson, Accountancy and Finance Lecturer at Arden University, considers what we can expect from ‘Britcoin’, how this will impact consumers, businesses, and the economy, and whether ‘Britcoin’ could be the revolution to restore our confidence in the banking system.

Trust in our financial system hit an all-time low post the 2008 financial crash. Even ten years on from the collapse of Lehman Brothers, a survey found 66% of adults in Britain still don’t trust banks to work in the best interests of society.

This means there remains to be apprehension for people to sign up to and use a bank to help manage their money. The UK doesn’t seem to struggle too much in this arena, however, as according to the Financial Conduct Authority (FCA), most UK consumers (96%) have a current account from a bank or building society. Regardless, there is still a significant number of adults who do not have a bank account or are what is known as ‘unbanked’.

The lack of trust plays a big part here. More people want better control over their money and to cut out the middleman, hence why cryptocurrencies and blockchain became a tempting option, as it can potentially remove the need for banks for any transactions. However, the volatility of these currencies has been a cause for concern for many investors and regulators.

Blockchain and cryptocurrency are gaining more traction and are becoming more of a viable option for businesses, especially due to talks of regulations coming into fruition. This is especially true with cryptocurrency, with the government announcing crypto assets will be subject to FCA rules in line with the same high standards that other financial promotions such as stocks, shares, and insurance products are held to.

The “Britcoin” aims to solve the issues traditional Bitcoin presents. It would be backed by the central bank, which would ensure its stability and reduce its volatility, making it a more attractive option for investors and providing greater confidence in the stability of the financial system. Britcoin will be as stable as the inherent stability of the British economy and political system. It would also provide an opportunity for the UK to stay at the forefront of technological developments in the finance system – a system in which it can sometimes be slow to react.

One of the key benefits of a digital pound is that it would be much faster and more efficient than traditional banking systems. Transactions could be completed almost instantly, regardless of where the parties involved are located. This would make cross-border transactions much easier and could even help to boost international trade.

The Bank of England’s Governor, Andrew Bailey, stated: “a digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability”, pointing toward the other advantage of a digital pound. It would offer more security as transactions would be recorded on a distributed ledger, which would make it much more difficult for hackers to tamper with the system. It would also provide greater transparency, as all transactions would be recorded on the ledger and could be easily traced if needed.

However, there are also some potential drawbacks. One concern is that it could lead to a reduction in the use of cash, which could have implications for those who do not have access to digital technologies or who prefer to use cash for privacy reasons. There are also concerns that a digital pound could be used for illicit activities, such as money laundering or terrorism financing. On top of this, more details are required in relation to the levels of personal account privacy; the potential to usher in ‘big brother’ banking systems is a growing a concern regarding state digital currencies.

Around 85 central banks are currently engaged in projects to create digital currencies, according to figures from the Bank for International Settlements. But as it stands, many feel there is probably little need for a digital pound; with a growing amount of people using their debit cards, phones and watches to fulfil the same function, a digital pound is deemed unnecessary. On top of this, many of the public fear that a government digital currency could potentially infringe on their privacy – despite the BoE stating the currency would be subject to rigorous standards of privacy and data protection.

And in countries where a digital currency has already been established, there has been little uptake – widely due to the lack of trust between central banks and citizens. It seems gaining users’ confidence should be the Bank’s first priority. The House of Lords economic affairs committee stated last year that a digital pound would pose “significant risks” such as state surveillance, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny and could be exploited by hostile states and criminals; it is safe to say that the nation’s ‘Britcoin’ will need to be very well thought out.

It has the potential to revolutionize the finance system, however, and could provide significant benefits to investors and consumers alike. However, the potential risks and drawbacks must be carefully considered before any decision is made to launch such a currency. Having said that, if it is implemented correctly, a digital pound could be a powerful tool for utilising technological developments in the finance system for the better.

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Banking

Why the future is phygital

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By Eric Megret-Dorne, Head of Card Issuance Services and Service Operations at Giesecke + Devrient

 

Digital banking has become increasingly ingrained in people’s everyday lives. Today, 73% of people globally use online banking at least once a month. Traditional bricks-and-mortar banks, which have long relied on the in-person experience with customers, are now having to step up their offering. With new ways of working blurring the work-home boundary, banks must ensure a fast, seamless connection between face-to-face processes and virtual customer experiences.

However, this does not mean that physical and digital banking are in competition with each other. In fact, many continue to use physical bank cards, with 1.12 billion in circulation in 2021, which provides the basis for digital payments and offerings. As a result, the benefits of digitalisation should converge with the comfort of physical touchpoints to create a holistic, “phygital” experience.

The path to phygital

Banks are accelerating their digital transformation strategies to keep up with the fast pace of fintech innovations. To meet the changing needs and preferences of customers, the payment world is leveraging new technologies to create personalised experiences through a range of different channels.

While the digitalisation of banking has been underway for quite some time – particularly for younger generations – events such as the Covid-19 crisis forced banks and customers of all ages to use digital tools and processes to compensate for branch, office, and call centre closures. With branches worldwide typically operating at reduced capacity due to social distancing requirements, consumers embraced online banking to avoid both the virus and potentially long queues.

However, some consumers still enjoy physical touchpoints, meaning a digital-only approach won’t suit everyone.

Striking a balance

It’s all about options – consumers now want to freely switch between traditional and digital channels without being forced into one. But how can banks achieve this phygital balance? One way is to equip physical channels with digital capabilities, so that online tools can augment the physical experience. For example, personalised bank cards with a bespoke design can be activated digitally, offering customers an extra layer of convenience. Having to wait for a new PIN to arrive in the mail is a common bugbear for consumers, so bringing card activation processes into the digital ecosystem will ensure a more seamless experience.

Greater automation in the card issuance and activation process enables the benefits of digital to be integrated into the physical banking experience without being intrusive. For instance, self-service kiosks empower customers to print their own cards, reducing the time between acquisition and card issuance, while still allowing for in-branch expertise if needed.

The personal touch

Phygital strategies also give banks a range of valuable data insights that can help them better serve their customers. This includes data on purchasing behaviours and habits, which can then be utilised to improve banks’ offerings and unify the physical and digital brand experience. Using omnichannel data helps to build a hyperpersonalisation strategy to provide real-time services.

In this way, digital solutions help banks maximise their user experience. Whenever a consumer interact with a bank, it creates data and behaviours. With fragmented databases, legacy systems and real-time data created by interactions with third-party partners through Application Programming Interfaces (APIs), it is not always easy for banks to streamline this data from different sources. By understanding patterns in that data and behaviours, banks can tailor and personalise unique experiences for each and every user.

Where security meets innovation

With big data opportunities abound, banks should be mindful of their consumers’ security concerns. Customers are now demanding much more transparency when it comes to how information is stored and collected. At the same time, they still desire greater personalisation via digital methods. Therefore, any successful phygital strategy requires a robust digital security to ensure customers have the same peace of mind as when they complete physical transactions.

To close the gap between innovation and security, banks should utilise tokenised infrastructure, which ensures the safe provision of payment credentials and securing of customer payments across all touchpoints. This is particularly important as regulations such as PSD2 and SCA demand strong authentication requirements.

The use of a token greatly enhances the consumer experience. For example, it allows for card details to be automatically updated for subscription services upon the expiry of an existing one, avoiding any service disruption.  Multi-factor authentication can also ensure an additional layer of security, as it combines a password with verifiable human biometrics such as fingerprints or facial recognition.

Best of both worlds

Every consumer has unique preferences when it comes to banking. Therefore, banks must evolve by bringing both physical and virtual touchpoints into a ‘phygital’ world. Only a phygital approach can meet the needs of all end users – whether they favour an in-person experience, an online one, or a blend of the two. The holistic data insights, personalisation opportunities, and optimised security ensured at every touchpoint are also critical in building future-ready banks.

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