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HOW DIGITAL IS MAKING THE ‘IMPOSSIBLE’ POSSIBLE FOR FINANCIAL FIRMS

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By Lavanya Kaul, Head of Customer Success, BFSI, UK&I, LTI

Article synopsis: Focused on the digital transformation of the banking and finance sector, and how recent events and changes in the way people work are playing a part in ecosystem. The article looks at the impact of cloud and data, and how the right technology can support companies in their digital journey, migration to the cloud, and the benefits that they will reap.

It was only a decade ago that the finance sector began to join the digital revolution. The monopoly of the long-established institutions, with their traditions and – arguably – resistance to change, meant that while other sectors were transforming operational and business models, financial services organisations remained largely remote from the internet and its attendant benefits. Processes were rigid – and there was a lot of paper involved.

Lavanya Kaul

How times have changed. Over the past few years, the financial sector has evolved, driven by the emergence of new players leveraging the power of the cloud, automation, and AI-assisted data analysis and management. As well as the overall shift in technology, the momentum has come from the employees – millennials who saw the potential of digital and start-ups that began to disrupt the staid world of banking and finance.

Staff turnover was high in the beginning though – change was not fast enough for the digital natives and while they joined the sector with high hopes, they quickly moved on. Latterly, and accelerated by the pandemic, there has been a far more rapid adoption by the sector of new tools and new ways of working. The paper has been pushed away.

 

More direct connections

The consequence of the digital catch-up, however, means that financial services are now competing with other sectors for talent – there is a huge shortage. All companies, not just in finance, have needed to look beyond the customer experience and become far more employee-focused, far more flexible, and now recognise the importance of work/life balance in order to attract and retain the best staff.

Although initially slow to react, finance companies are now turning to digital technologies. The pandemic was a key factor in incentivising the sector to become fully data-driven. With tools to enhance labour productivity, technology has also transformed the ways of working, sharpening the focus on the employee experience. Digital upskilling is being achieved through the use of collaboration tools and gamification strategies to engage with both employees and customers.

The most important contribution to the digital transformation has been the arrival of the cloud. With the ever-increasing data deluge, cloud computing means data can be analysed and managed in a meaningful way. The route to relevant, actionable insights is far quicker with cloud-based services, and third-party applications can be easily integrated and exploited. There are of course also the basic cost-savings of hardware upgrades and legacy platform management. While financial companies used to spend huge amounts of time and money building their own service offerings, now they can have software-as-a-service (SaaS), which automatically keeps them up to date with the latest software. Business improvements can be made immediately after the new software is available – it’s a minimal OPEX model that allows businesses to be agile, adaptable, compliant, and risk free.

 

Fail fast to succeed

The key to a successful digital transformation is to adopt a ‘fail-fast’ approach. While a long-term plan or roadmap is still needed, the beauty of digital is its flexibility. It enables businesses to be agile and dynamic. If something is not working to the advantage of the business, drop it and move on. Work with short windows of opportunity and timescales.

The pandemic has provided a great example of how our customers have benefited from the agility of digital services. With the closure of branches and offices, financial services companies were inundated with calls from customers looking for advice and support. Failure to respond to these demands quickly and efficiently has had a massive impact on the perception of not only the financial services brand but its perceived health and ability to survive in an unprecedented situation. The rapid development of a conversational AI platform has not only helped our clients avoid a negative reaction, but it has also drastically reduced the workload of their call centre staff and greatly improved customer service levels.

Supporting clients with their cloud migration has highlighted the benefits of the digital transformation of the finance sector. Our work with a Hollywood wealth advisor to build an analytical engine for examining positions, portfolio construction, client preferences and more has assisted them in generating personalised investment analysis reports, and helped them transform their services to their high-net worth clients.

Digital platforms can modernise and/or replace legacy systems, providing scalability, reducing cost, and enabling a much more rapid time to market for new products and services. Cloud requires no enormous upfront investment or stifling licensing costs. It enables financial services companies to remain competitive, without worrying about technology cycles. Organisations that are slow to adapt in today’s climate will not succeed – the competition will be out in front.

Banking

2022 ESG Investment Trends

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Jay Mukhey, Senior Director, ESG at Finastra

 

Environmental, Social and Governance (ESG) themes have been front and center throughout the pandemic. While the framework has been surging in popularity for several years, COVID-19 served as a period of reflection causing many companies, investors and other individuals to take these factors seriously. It’s something that we can no longer afford to ignore.

Jay Mukhey

We are witnessing drought, adverse weather patterns, hotter climates, and wildfires with more regularity, raising the profile of the climate crisis. Efforts were renewed at COP26 in Glasgow last November to help address the challenge, with the signing of the Glasgow Climate Pact and agreement of the Paris Rulebook. As a result, we are now seeing record net new inflows into ESG investing and impact.

 

Evaluating ESG criteria

Long gone are the days when ESG issues were at the periphery of a company’s operations. In just a few short years, ESG criteria have become a key metric for investors to evaluate businesses they are considering investing in.

Investor money has poured into funds that consider environmental, social and governance issues. Data from the US SIF Forum for Sustainable and Responsible Investment shows that ESG funds under management have now reached more than $16.6 trillion. It’s not just institutional investors who are embracing ESG, with Bloomberg Intelligence predicting that savers across the world will amass £30.2 trillion in ESG funds by the end of the year.

Due to the multitude of divergent factors that contribute to a company’s success on ESG, it can be tricky to pin down exactly what criteria to measure. Depending on the industry a company operates within, environmental criteria could include everything from energy usage, the disposal of waste and even the treatment of animals.

Social criteria are primarily related to how a company conducts itself in business relationships and with stakeholders. For example, does it treat suppliers fairly? Is the local community considered when the business makes decisions that would impact them? Do they have a statement and policy around modern slavery?

While governance criteria have traditionally been an afterthought, this may be changing. Everything from executive pay to shareholder rights and internal controls are relevant to investors within these criteria.

 

Tracking ESG for competitive advantage

Many experts within the financial services industry point to the power of ESG as a major competitive advantage, if used correctly. It has been noted that increasingly corporations, from big Fortune 500 companies down to small scale-ups, will communicate on their sustainability metrics to grow their business and to attract talent. However, it’s no longer enough to just pay lip service to ESG issues, with abstract commitments increasingly being seen as insufficient. Companies must now quickly progress to concrete objectives that can be measured and tracked.

A wide range of data providers now offer detailed information and tools that can measure ESG performance and effectiveness. Yet major challenges remain around bringing together what is often extremely fragmented data and transforming it into actionable insights.

 

Focus areas for 2022

The ESG criteria that investors measure is by no means stagnant. Complex societal challenges regularly emerge that require the attention of companies. Contributors recognize several topics that demand a sophisticated approach, including the COVID pandemic, diversity challenges and powerful social movements.

Companies operating within the financial services sector face several specific challenges related to ESG, with contributors believing that fintech will also continue to play a central role in finding answers to them.
For example, industry experts expect customers to be more demanding of firms in SME lending when it comes to understanding exactly what impact they are having on the climate. For many financial services firms, 2022 will be the year that they will try to reduce the time it takes to bring ESG products and services to market, such as green loans and mortgages, as well as checking accounts with sustainability and carbon tracking capabilities.

When selecting a service provider, customers are increasingly interested in the ESG credentials of their bank or financial institution. Research from PwC finds that 80% of consumers are more likely to buy from a company that stands up for environmental and governance issues. Consumers are one of the main drivers of ESG and many are putting their money where their mouth is. It’s a trend that’s not going away; financial institutions need to start implementing their strategy for ESG now.

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Banking

Opportunities for UK Challenger Banks to address AML Compliance

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Author: Gabriel Hopkins, Chief Product Officer, Ripjar

 

UK challenger banks have revolutionised the banking sector with innovative products and services,  offering greater flexibility to consumers that their legacy competitors have been unable to match. Research tells us that the value of the neo and challenger bank market will continue to grow rapidly, reaching an estimated $471 billion globally by 2027. However, the opportunities that challenger banks bring also provide new regulatory challenges, with the potential for disruptive services to  increase the risk of money laundering and other financial crimes.

Challenger Bank AML Vulnerabilities

The Financial Conduct Authority (FCA) last month raised concerns over the adequacy of challenger bank tactics in meeting regulatory requirements. The review reveals that some are falling short of effectively implementing important anti-money laundering (AML) procedures and controls, following a substantial increase in suspicious activity reports reported in 2021. The findings come as the regulator attempts to bolster its approach against money laundering, which the National Crime Agency estimates costs the UK £100bn annually.

The FCA review investigated six unnamed challenger banks that had recently entered the financial market and which together had a customer base of over 8 million customers. While the FCA commended the challenger banks’ “innovative use of technology” accelerating average customer identification and verification, it, also raised serious areas of concern stating: “there cannot be a trade-off between quick and easy account opening and robust financial crime controls.” These concerns broadly cover the following four points:

  • Failures to carry out adequate checks on customer income and occupation
  • Failures to assess customers’ risks, making it difficult to carry out due diligence measures for high risk AML alerts
  • A lack of sufficient detail in customer risk assessments
  • Unproductive management of AML alerts, hindering quick responses

The above findings as described above indicate there is a critical need for challenger banks to pair their innovative fintech capabilities with a safety-minded approach to their AML processes.

The Importance Of Customer Data

AML compliance, and the due diligence and screening processes it encompasses, may be especially complex for challenger banks since their propositions rely on swiftness, simplicity, functionality and flexibility.

The FCA’s review tells us that challenger banks’ AML issues are caused by insufficient quality of customer data with which to base precise risk-profiles and make key compliance conclusions. When challenger banks have difficulty in meeting their data collection and risk management needs, they are forced to compromise the benefits of their products and services by spending resources on AML compliance – or risking regulatory consequences.

Challenger Bank AML Solutions

Many challenger banks are able to meet their AML obligations by rolling out tailored risk management solutions, however, they may become unstuck balancing their compliance responsibilities while also delivering innovation. To keep up with the ever evolving threat landscape, the AML regulatory environment is engaged in a game of cat and mouse, often implementing new legislation to remain on the heels of new criminal tactics and methodologies.

However, rather than depending on a potentially-exposed and unproven bespoke solutions, challenger banks can instead turn to the expertise of established, industry-trusted platforms with dedicated CDD and EDD resources and multi-faceted AML and KYC screening tools.

Automated AML compliance solutions help challenger banks grapple with threats, incorporating customer data from sources across the world quickly and efficiently, and adjust in real time as the risk landscape evolves. Trusted AML solutions may include multiple language screening capabilities, helping challenger banks better manage CDD and EDD for customers around the world without producing unmanageable volumes of false positive alerts.

Financial crime is on the rise. Addressing the common weaknesses in key areas of challenger banks’ financial crime systems should be seen as a priority. Evaluating their approach to identifying and assessing the financial crime risks they are exposed to is a first step in the right direction. Extra attention should be paid to risk assessment processes to avoid running afoul of the Money Laundering Regulations. It would be especially prudent if this is carried out as the FCA has signalled they will be seeking updates from challenger banks regarding their financial crime frameworks.

 

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