By David Ritter, Financial Services Strategist at CI&T
As investment booms, unemployment falls, and Europe’s economy soars, financial institutions are set to enjoy a strong year in 2022. But with consumer behaviour changing post-pandemic, banks will need to adopt new online strategies and escalate their digital transformations to stay competitive in the new digital-first world. To help your organisation prepare for essential innovation, here are my top predictions for the financial services industry in 2022.
The ongoing rise of open finance
The move to digital banking throughout COVID-19 lockdowns will accelerate open finance during 2022 – with customers now much more willing to share their data with third-party apps, online trading platforms, and other non-traditional services.
These new consumer attitudes will continue to fuel the growth of digital challengers and provoke a response from legacy institutions. Many Tier 1 banks will upgrade their in-house data systems and infrastructures, and begin to launch Banking-as-a-Service offerings to tap into new markets and recover lost revenue. They’ll also begin to sell the benefits of data-sharing to more hesitant customers, explaining how resultant new services can help them to better manage their finances while demonstrating efforts towards safeguarding consumer information.
As open banking standards such as PSD2 develop and strengthen, the uptake of banking services for the unbanked and underbanked will grow, too. Fintechs have shown that it’s feasible to offer basic banking services to people with little or poor credit history. Traditional banks will begin to introduce similar services in an attempt to grow the market and win back their lost share.
Open-data ecosystems will continue to evolve – albeit slowly
As digital banking and open finance flourish, businesses will capture huge amounts of data that potentially contains crucial customer insights. To store, sort, and analyse the value of this information requires access to an open-data ecosystem – but such ecosystems won’t be transforming the financial industry just yet.
Unlike other software industries using open-data ecosystems, financial services companies are highly regulated, and the data being stored is particularly sensitive and personal. First, banks and the broader data-sharing ecosystem will need to develop protocols that protect data security and privacy before they focus on customer analysis. Consumers trust banks with their financial data to a much greater extent than other big technology platforms, but that goodwill could easily be squandered without proper care.
In the meantime, open-data ecosystems will continue to improve to the point when, for financial institutions, the wait will be worthwhile. New tools will emerge to help engineers manage and extract value from the data faster than ever. And businesses will be able to adopt open-source data formats, enabling their data to be compatible across programming languages and future analytical tools, removing the need for expensive data transformations.
Hyper-personalisation will become an imperative
With more and more fintech businesses emerging throughout 2022, existing banks will find ways to differentiate themselves from the competition – and take advantage of new advances in personalisation.
Customers are used to enjoying products and features tailored to their tastes, from Netflix’s suggested TV shows to Amazon’s bespoke discounts. Now, they expect the same from their financial services. For banks, this could mean sending customers relevant offers from partnered retailers, offering AI-powered budgeting advice if a user overspends, or even creating loan agreements instantly tailored to meet a consumer’s needs.
To achieve hyper-personalisation, banks will upgrade their data foundations and architecture, and graduate to predictive/prescriptive analytics that enable their services to be customised in a way that resonates with customers.
Digital upstarts will boost customer experience and industry collaboration
Digital challenger banks have revolutionised the customer experience in recent years, with slick interfaces, fast sign-ups, and new services like commission-free trading of securities drawing masses of consumers away from Tier 1s. In 2022, incumbents will begin to push back, improving the customer experience for both basic banking and complex transactions like mortgages by offering speedy self-service tools as standard practice. In turn, digitising and automating these processes will reduce the manual workloads on back-office staff, freeing up resources to further maximise profit potential.
Large financial institutions will also recruit chief technology and chief information officers from tech providers and outside industries to unlock fresh perspectives on how to compete with challengers. These new leaders will be more open than traditional bank chiefs to collaboration with outsiders, including rivals, and will push to integrate third-party services into the bank’s suite of offerings to boost innovation and consumer attraction.
Financial institutions will then transition from building and managing databases – which is very capital-intensive – to agile, cloud-based data architectures and applications. Legacy infrastructure and the inability to bridge data systems have long stifled innovation and the customer experience. However, with the influence of tech-centric CTOs and CIOs, financial services companies will modernise their outdated IT models by embracing cloud migration. As a result, I expect innovation by incumbent financial institutions to surge throughout 2022 and beyond.
The Evolution and Challenges of Crypto Regulation
Cryptocurrency regulations are evolving quickly around the globe with authorities responding to developing risks professed by criminals exploiting the latest payment methods to mask and launder the profits from their crimes.
According to William Je Founder & CEO, Hamilton Investment Management Ltd, this has warranted the introduction of a more stringent level of due diligence by additional bodies to introduce preventative measures.
William Je Founder & CEO, Hamilton Investment Management Ltd explains: “The past ten years has seen several structural changes in Know Your Customer (KYC) and anti-money laundering (AML) regulations in both Europe and across the world. High-profile money laundering cases and the penetration of illegal monies into global markets have caught the attention of regulators.
“As regulators improve their understanding of these criminal practices, AML requirements have also been improved. However, these improvements have been a reactive process.”
To address the challenges of the blockchain ecosystem, the European Union has started to introduce financial regulations that further bolster the regulatory system in order to improve licensing models. Many member states are regulating crypto assets individually, and Germany is leading the way in being the first to regulate.
Je continues: “These national driven regulations clearly point to a future pathway for crypto companies, outlining the requirements for obtaining and maintaining a financial license from the regulator.
“Compliance, however, is to my mind essential as it not only boosts investor confidence but adds a necessary layer of protection to investors.”
As crypto evolves, so have regulatory bodies’ efforts to monitor, address and enforce restrictions. The most prominent is the Financial Action Task Force (FATF), which details guidance and determines best practices in anti-money-laundering practices and combating the financing of terrorism.
FATF Recommendations number 16, better known as the ‘travel rule’, which requires businesses to collect and store the personal data of the originators and the beneficiaries in blockchain transactions, is the most notable.
Je concludes: “What does this mean? In theory, access to this data will enable authorities to have better oversight and enforcement of crypto market regulations. In other words, they’ll know exactly who is doing exactly what.
As we have always argued – transparency is key. We need to regulate crypto as an asset class with efficacy, which necessitates legislation that is applicable specifically to digital assets and does not hinder the market.
The criminal financial trade which arguably encompasses money laundering, illegal weapons sales, human trafficking, is also international. Thus, cracking down on it is, out of necessity, an international effort.
The decentralised nature of blockchain, which runs contrary to the central-server standard we know and use nearly everywhere, presents a formidable challenge here. Rules and regulations for traditional financial institutions are being implemented wholescale into the crypto sector. We believe that this is arguably wrong footed as it ignores the innovation and uniqueness this asset class and its underlying technology entails.
Traditional forms of regulation from the fiat world do not reciprocally apply to every aspect of crypto nor to the fundamental nature of blockchain technology. However well-intentioned they may be, because these imposed regulations are built on an old system, they must be adapted and modified.”
How bug bounty programs can help financial institutions be more secure
Rodolphe Harand, Managing Director at YesWeHack
Financial services have been one of the most heavily targeted industries by cybercriminals for several years. One alarming stat from the Boston Consulting Group found these firms to be 300x as likely as other companies to be targeted by cyberattacks.
Furthermore, the pandemic has led to a significant increase in the number of cyberattacks targeting financial institutions (FIs), with around 74% experiencing a spike in threats linked to COVID-19.
With FIs holding some of the largest collections of sensitive and private data, it’s clear they will remain an attractive target for malicious actors, especially as any data stolen can be used for fraudulent activities. This leads to the reputational damage of the financial entity that was compromised and has a knock-on effect in terms of monetary and reputational damage to affected customers.
For CISOs at FIs, the conundrum faced is how do you protect intellectual and customer data, and ensure accountability and transparency for clients and stakeholders, at a time when the pandemic has created budget constraints. Research from BAE Systems found that last year alone, IT security, cybercrime as well as fraud and risk departments had their budgets cut by a third.
Below we look at how bug bounty programs can help to address these pressing issues.
Protecting valuable data
Protecting customer and intellectual data has always been a top priority for FIs. However, as opportunistic cybercriminals have a lot to gain by stealing this valuable data, there is a constant evolution of threats, which means FIs must stay on their toes. By deploying a bug bounty program, FIs can work with ethical hackers that have a wealth of experience and unique skills when it comes to identifying security weaknesses within a FI’s defence, thus helping to implement effective security measures to help prevent data breaches.
Building trust among various stakeholders such as customers, suppliers and investors is critical for achieving business goals. By deploying a bug bounty program, FIs send out a message that they care about protecting the security of the data of those they work with – which in turn can have a cascading effect resulting in better business performance.
For FIs to win customers and keep them happy, amidst the growing threat of neo banks and customer-centric fintech organisations, speed of innovation is crucial. As such, many FIs have adopted an agile approach to build, test, and release software faster to bring online and mobile banking solutions to market quicker. However, this can create frictions between development and security teams. Security mandates are deemed to be unnecessarily intrusive and a cause of delayed application development and deployment.
Yet, with DevOps teams needing to build and deploy applications faster than ever before, an epidemic of insecure applications has emerged. According to Osterman Research, 81% of developers admit to knowingly releasing vulnerable applications, while research from WhiteSource found 73% of developers are forced to cut corners and sacrifice security over speed.
With developers often not having the time, tools, skills, or motivation to write impeccably secure code, there is an evident need to provide developers with more support when it comes to building applications securely Fortunately, bug bounty programs can provide a “fact-based” financial implication of inherent security flaws within the process. This makes it possible to hold development teams and service providers accountable for creating or delivering insecure products, thus addressing inherent security gaps within the business units and helping to drive continuous improvement.
Moreover, security awareness and education of developments teams can be improved significantly for those developers that are directly involved with the management of vulnerability reports for their bug bounty programs. This is because, the mere fact of exchanging information with ethical hackers, or assimilating the thinking of a potential hacker and having proof of concepts of vulnerability exploitation on their application components, naturally accelerates consideration of security early in the development stage and provides ongoing learning.
Get more return on your investment
According to Gartner, 30% of CISOs effectiveness will be directly measured on their ability to create value for the business. When security budgets are challenged, CISOs need to demonstrate business value through initiatives designed to enhance efficiency whilst stretching the dollar.
This is where bug bounties can help tremendously. Compared to conventional penetration testing, bug bounty offers a fast, complete, and measurable return on your security investment, with businesses only paying out for successful discovery of vulnerabilities. Equally, businesses get access to hundreds of ethical hackers that can test their programs, each with their own unique skillsets as opposed to only one skilled researcher testing the network. This results-driven model ensures you pay for the vulnerabilities that pose a threat to your organisation and not for the time or effort it took to find them.
Bug bounty programs also deliver rapid vulnerability discovery across multiple attack surfaces. With this approach, organisations receive prioritised vulnerabilities and real-time remediation advice throughout the process to accelerate the discovery of, and solution to vulnerabilities.
Another appeal of bug bounties is that due to the continuous nature of testing, more vulnerabilities are found over time as opposed to pen-testing. This is key to financial institutions that require agility to keep up with the continuous roll-out and updates of applications.
The cornerstone to a successful security programme
The risk posed to financial institutions by cyber threats will only continue, as evidenced by the number of data breaches seen in recent times. The COVID-19 pandemic has only exacerbated these risks, especially with almost all FIs having needed to shift to a remote working environment – which has only widened the attack landscape.
For FIs, a bug bounty program should be considered a fundamental cornerstone of any security strategy, with it being a modern-day cybersecurity solution that is well-equipped to tackle the immediate security challenges they face. In doing so, FIs will not only prove to customers and stakeholders their commitment to data protection and security but this will also be help them to avoid the monetary damages that could be imposed by regulators if a breach was to take place.
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