By Joe Bowerbank, Senior Business Development Manager, Creditinfo
Over 2 billion people have limited or no access to financial services. Though this figure is slowly decreasing year on year, the barrier to entry is kept high by the fact that most financial institutions around the world will only take into account data from ‘traditional’ data sources – such as utility bills or credit card statements – when considering applicants. Yet many people have no bank accounts and so little or no credit history to their name, especially those living and working in less economically developed or emerging markets.
Without the relevant data, financial institutions cannot perform the necessary due diligence on potential customers. This leaves many – even responsible, creditworthy people – severely restricted.
Financial inclusion is goal number seven of the United Nation’s sustainable development goals. It is crucial to improving quality of life, helps to create a more stable and sustainable financial system and supports the alleviation of poverty. Nevertheless, the global potential banked population is still being underserved.
Tapping into the banking insights of the unbanked
How do financial institutions calculate risk among the billions of people who have never had a bank account or opened a credit line? It’s a tricky question to answer.
The good news is that there is an abundance of alternative data than can be leveraged to assess the creditworthiness of individuals and organisations. For example, although only 34.5% of the population of the Philippines have a bank account, there are 1.59 mobile phones for every person in the country. The majority of those will be on a prepaid plan.
Data around people’s payments for mobile phone plans, other fintech apps, and even social media use, can be used to develop market level credit risk scores to offer companies and individuals who don’t have bank accounts a route in. Additionally, bringing alternative data into the process can funnel liquidity into emerging markets and encourage a healthier financial ecosystem.
However, the problem is that it’s not just a question of there being too little data on hand. Banks know this information is out there, but often lack the capability to collect and interpret the data. They need the tools to make an informed lending decision and extend financial services to the unbanked.
The abundance of alternative data that we know is out there needs to be shared with the right parties, along with the tools to analyse it, otherwise the data becomes all but redundant.
A real-world example: facilitating housing finance loans in Pakistan
In Pakistan, the number of housing finance loans that have been granted is insignificant compared to the size of the country’s population. While 10 million citizens have access to formal credit, around 105 million over the age of eighteen do not. With little credit history data to go off, banks are left unable to increase the number of loans they’re offering.
The traditional system just doesn’t work for Pakistan’s citizens right now, leaving them without means to access housing loans, while at the same time stifling the country’s economic growth.
As we inch towards a global recession, financial issues that are having such a significant impact on the economy are rightfully top of mind for the government in Pakistan. As a result, it has backed an initiative to bring more liquidity into the market.
Set up in 2021 by Pakistan Banks’ Association (PBA), the initiative works to combine traditional data sources such as credit bureau data and internal banking data with alternative sources such as mobile phone metadata in order to widen the pool of potential applicants for housing financial loans.
Importance of data accessibility for Pakistan’s financial institutions
The success of the initiative hinges not just on the data itself, but on having two things: a bridge between the alternative data and all the different financial institutions – from credit bureaus to banks –, and the tools to leverage this data, allowing them to overlay best lending practice on top of the data to make correct decisions.
This is where Creditinfo stepped in. The PBA looked to the credit bureau and financial data expert to lead the consortium of parties – including credit bureaus and ratings agencies – in Pakistan towards this goal. Creditinfo acted as the bridge between organisations and the data, helping them to access and analyse it. The co-operation has led to the development of a market-level application scorecard and income estimation model, which have acted to increase the percentage of the population that has a data footprint capable of informing robust credit risk decisions.
The first project of its kind in the country, it has therefore enabled financial services to provide loans to more of the population, especially those in low-income segments previously excluded from traditional housing finance.
The project will go on to support the Naya Pakistan Housing Programme (NPHP), a government-backed initiative providing low-cost, affordable housing to deserving individuals in Pakistan that is expected to be a catalyst to accelerated economic activity and increased job opportunities in the region following the negative impact of Covid-19.
Tax giveaway is a boost for business, but will it drive growth or fuel inflation?
Chancellor Kwasi Kwarteng has announced a comprehensive wave of tax cuts and other incentives for individuals and businesses, as well as confirming some of the announcements made earlier this week. The measures are part of a new Growth Plan, which is aiming to boost economic growth. However, only time will tell if they will curb inflation and temper recession concerns.
Richard Godmon, tax partner at accountancy firm, Menzies LLP, said:
“With another fiscal statement to follow, this mini-Budget is a defining moment for the new Government and tax cuts are firmly back on the agenda.
“The biggest surprise was the decision to simplify Income Tax by moving to a single higher rate of tax for high earners of 40%, with effect from April next year. This will encourage a spirit of entrepreneurialism by incentivising work and putting money back into the economy. The flip side is that the Government might also be hoping that the move increases the tax take, as it could help to draw people back to the UK who may have previously chosen to live and work elsewhere, while encouraging others to stay put.
“The reduction in dividend tax rates and the abolition of the additional rate of tax from April 2023 means that business owners will need to consider carefully the timing of dividend payments over the next few months.”
Up to 40 new Investment Zones
The Chancellor also outlined plans to create up to 40 new ‘investment zones’ in England, with the potential for more in Wales, Scotland and Northern Ireland. Businesses in these zones will benefit from wide-ranging tax breaks including 100% tax relief on investments in plant and machinery, and no National Insurance Contributions will be payable on the first £50,000 earned by new employees.
Richard Godmon, tax partner at Menzies LLP, said: “The new Investment Zones are reminiscent of the former Enterprise Zones, but they will provide a much more favourable tax environment for businesses and they promise to become a magnet for inward investment. There are currently 38 areas in England on the list for consideration and we look forward to finding out which ones will be selected.”
Incentivising business investment and Corporation Tax rise ‘cancelled’
The limit of the Annual Investment Allowance (AIA) will not revert to £200,000 as planned in April next year, it will now permanently stay at £1 million.
Richard Godmon, tax partner at Menzies LLP, said:
“Capital allowances are highly valued by businesses and they will be pleased that this one in particularly is going to stick at £1 million and that this is no longer being described as a temporary measure, but is to be made permanent.
“The decision to cancel the planned increase in Corporation Tax (due to tax effect next April) will be a relief to many small and medium-sized businesses who have been concerned that this increase would erode profits further and make it even more challenging to remain viable.”
Incentivising entrepreneurial investment
The Chancellor highlighted plans to increase the cap on investments that can be made under the Seed Enterprise Investment Scheme (SEIS) from £150,000 to £250,000. Individuals making investments in start-ups up have had the limit doubled to £200,000, with the 50% income tax relief remining the same. The Government also gave its commitment to continuing to back the Enterprise Investment Scheme (EIS).
“These announcements send a signal to entrepreneurial investors that tax should not be a barrier and the Chancellor wants to expand incentives in this area,” added Richard Godmon, tax partner at Menzies LLP.
Stamp Duty Land Tax
The threshold at which Stamp Duty Land Tax (SDLT) becomes payable on residential property purchases in the UK has been raised to £250,000, double its previous level in a bid to boost the property market. In addition, first-time buyers will not have to pay SDLT on property purchases up to a value of £425,000 (up from £300,000). Both measures will take effect from today.
Richard Godmon, tax partner at Menzies LLP, said:
“The decision to raise the SDLT threshold is designed to build consumer confidence and boost the housing market generally. For property developers it will fuel activity by creating demand, particularly from first-time buyers, and help to free up finance to front-end development projects.”
Richard Godmon, tax partner at Menzies LLP, said:
“The repealing of the 2017 and 2021 IR35 changes will be hugely welcomed as it will remove an administrative burden, risk and cost, enabling businesses to devote resources to furthering their growth strategies.
“It is important to recognise that IR35 has not been abolished and the result of the changes is that the risk and compliance costs are being returned to the individuals and their personal service companies. HMRC will no doubt redirect their focus towards the contractors, which will bring challenges and make enforcement more difficult.”
A zero trust environment is critical for financial services
Not long ago security professionals were still focused on protecting their IT in a similar formation to mediaeval guards protecting a walled city – concentrating on making it as difficult as possible to get inside. Once past this perimeter though, access to what was within was endless. For financial services, this means access to everything from personal identifiable information (PII) including credit card numbers, names, social security information and more ‘marketable data’. Unfortunately, we have many examples of how this type of security doesn’t work, the castle gets stormed and the data isn’t protected. The most famous is still the Equifax incident, where a small breach has led to years of unhappy customers.
Thankfully the mindset has shifted spurred on by the proliferation of networks and applications across geographies, devices and cloud platforms. This has made the classic point to point security obsolete. The perimeter has changed, it is fluid, so reliance on a wall for protection also has to change.
Zero trust presents a new paradigm for cybersecurity. In this context, it is already assumed that the perimeter is breached,no users are trusted, and trust cannot be gained simply by physical or network location. Every user, device and connection must be continually verified and audited.
What might seem obvious, but begs repeating, with the amount of confidential customer and client data that financial institutions hold – not to mention the regulations – this should be an even bigger priority. The perceived value of this data also makes financial services organisations a primary target for data breaches.
But how do you create a zero trust environment?
Keeping the data secure
While ensuring that access to banking apps and online services is vital, it is actually the database that is the backend of these applications that is a key part of creating a zero trust environment. The database contains so much of an organisation’s sensitive, and regulated, information, as well as data that may not be sensitive but is critical to keeping the organisation running. This is why it is imperative that a database is ready and able to work in a zero trust environment.
As more databases are becoming cloud based services, a big part of this is ensuring that the database is secure by default, meaning it is secure out of the box. This takes some of the responsibility for security out of the hands of administrators because the highest levels of security are in place from the start, without requiring attention from users or administrators. To allow access, users and administrators must proactively make changes – nothing is automatically granted.
As more financial institutions embrace the cloud, this can get more complicated. The security responsibilities are divided between the clients’ own organisation, the cloud providers and the vendors of the cloud services being used. This is known as the shared responsibility model. This moves away from the classic model where IT owns hardening the servers and security, then needs to harden the software on top – say the version of the database software – and then needs to harden the actual application code. In this model, the hardware (CPU, network, storage) are solely in the realm of the cloud provider that provisions these systems. The service provider for a Data-as-a-Service model then delivers the database hardened to the client with a designated endpoint. Only then does the actual client team and their application developers and DevOps team come into play for the actual “solution”.
Security and resilience in the cloud are only possible when everyone is clear on their roles and responsibilities. Shared responsibility recognizes that cloud vendors ensure that their products are secure by default, while still available, but also that organisations take appropriate steps to continue to protect the data they keep in the cloud.
In banks and finance organisations, there is always lots of focus on customer authentication, making sure that accessing funds is as secure as possible. But it is also important to make sure that access to the database on the other end is secure. An IT organisation can use any number of methods to allow users to authenticate themselves to a database. Most often that includes a username and password, but given the increased need to maintain the privacy of confidential customer information by financial services organisations this should only be viewed as a base layer.
At the database layer, it is important to have transport layer security and SCRAM authentication which enables traffic from clients to the database to be authenticated and encrypted in transit.
Passwordless authentication is also something that should be considered – not just for customers, but internal teams as well. This can be done in multiple ways with the database, either auto-generated certificates that are needed to access the database or advanced options for organisations already using X.509 certificates and have a certificate management infrastructure.
Tracking is a key component
As a highly regulated industry, it is also important to monitor your zero trust environment to ensure that it remains in force and exompasses your database. The database should be able to log all actions or have functionality to apply filters to capture only specific events, users or roles.
Role-based auditing lets you log and report activities by specific roles, such as userAdmin or dbAdmin, coupled with any roles inherited by each user, rather than having to extract activity for each individual administrator. This approach makes it easier for organisations to enforce end-to-end operational control and maintain the insight necessary for compliance and reporting.
Next level encryption
With large amounts of valuable data, financial institutions also need to make sure that they are embracing encryption – in flight, at rest and even in use. Securing data with client-side field-level encryption allows you to move to managed services in the cloud with greater confidence. The database only works with encrypted fields and organisations control their own encryption keys, rather than having the database provider manage them. This additional layer of security enforces an even more fine-grained separation of duties between those who use the database and those who administer and manage it.
Also, as more data is being transmitted and stored in the cloud – some of which are highly sensitive workloads – additional technical options to control and limit access to confidential and regulated data is needed. However, this data still needs to be used. So ensuring that in-use data encryption is part of your zero trust solution is vital. This also enables organisations to confidently store sensitive data, meeting compliance requirements, while also enabling different parts of the business to gain access and insights from it.
Securing data is only going to continue to become more important for all organisations, but for those in financial services the stakes can be even higher. Leaving the perimeter mentality to the history books and moving towards zero trust – especially as cloud and as-a-service infrastructure permeates the industry – is the only way to protect such valuable data.
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