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The need for AI and machine learning in volatile markets

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AI and machine learning

Francesca CCO at Axyon AI

 

Since the outset of the pandemic, the global economy has experienced much uncertainty. Although many people expected this year to be another good year for the stock market as the world economy continues recovering from the crisis, fears over the recent developments of the Omicron variant, together with unclear messages from central banks, have caused more instability. This market volatility presents fund managers with significant operational and performance-related challenges and a potential retention issue in the face of further volatility due to new variants and unexpected developments. So, how can AI and machine learning help investors prepare for this volatility and demonstrate resilience to their clients?

 

AI’s transformative role for asset management firms

Ultimately, AI and machine learning enable fund and asset managers to gain valuable time to adjust risk and protect investments with the intrinsic value of predictive analytics. It can also help businesses navigate challenging conditions by detecting anomalies in the market before any crisis occurs. By implementing AI, fund and asset managers can also monetise data and improve automation from the front to the back office.

 

AI vs. traditional models

While nobody can predict the unpredictable, market disruption is often on the cards. Many investors have lost confidence in asset managers who managed portfolios using traditional quantitative models, as they struggled to keep up with volatile market conditions. As such, funds need to find a way to better mitigate the risks with powerful predictive analytics of fast-moving markets and avoid losing investor confidence. In today’s world, relying on traditional portfolio management models when a market crisis occurs can result in the investments becoming severely impaired and can push a large amount of chaotic data into quantitative models. Therefore, asset managers need a system that can account for volatility and manage expectations more accurately.

Traditional portfolio models are built around strong assumptions on the behaviour of underlying assets, measuring normal distribution patterns on linear scales. As a result, they find it difficult to cope with the flood of chaotic data into their systems caused by high levels of volatility and fund managers’ ability to accurately analyse and predict where the market would go next and navigate through the crisis was significantly limited. Throughout the COVID-19 pandemic and consequent volatility, businesses with these models have had their limitations exposed.

Advanced AI systems are unrivalled from portfolio management to risk management for example detecting anomalies in the market. AI models can handle large and chaotic sets of data learning from the past the actual relationship among variables. Moreover, the application of advanced analytics to these data sets may also provide more real-time insight into the risks related to these shocks for the stock market.

Unlike these traditional models, AI systems are completely agnostic about markets and their associated risks, meaning that they can be trained to sound the alarm when the structure in the data is anomalous, and therefore could be a sign of an upcoming unpredictable event. These AI-powered tools can be also used to read the reality of the situation at hand, without any pre-ordered rules.

By strengthening a model against chaotic data, AI allows fund managers to see non-linear, complex patterns in asset behaviours that can be captured, and make market view predictions at a higher level, no matter how changeable conditions become.

 

Turning Point: The pandemic as an opportunity for change

The pandemic is still an opportunity for new technologies to prove their merits and show that AI and machine learning can offer a better way to use data and quickly adapt to the ever-changing ‘new normal’. By modelling the potential repercussions of major geopolitical, financial, or environmental events, businesses will be better placed to adapt, reposition, and overcome the obstacles the pandemic presents.

We have seen that investment in technology and data infrastructure is working its way up asset managers’ agendas, and AI and machine learning has by no means reached its limits. Advancements in technology will mean improvements to business performance will continue, and due to the wealth of data already stored in most financial institutions, there is great potential to build on the success of previous solutions. Businesses who are late to harness the superior analytical power of AI will likely find themselves trailing behind the competition. Implementing these innovative machine learning technologies will undoubtedly be a powerful solution to the problem of meeting and exceeding investors’ expectations of mitigated risk and higher returns.

 

Technology

Why anti-spoofing fingerprint technology is essential for the continued growth of digital payments

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Anthony Eaton, CTO, IDEX Biometrics

 

The digital payments revolution is being driven by consumer demand for ever increasing convenience. This is leading the global digital payments market towards a value of US$204.1 billion by 2028. However, along with increased convenience, comes an implicit expectation to provide higher levels of security, especially when paying with contactless cards and digital wallets.

According to McKinsey, electronic payments are growing at twice the rate of GDP in North America and Europe. This expanding market has the fintech sector overstretched as they try to address operational risks without hampering customer experience and face increased fraud control expectations. If fintechs struggle to implement effective controls, they are likely to see heightened regulation in the future, which in turn can negatively impact consumer experience.

Amid this burgeoning market, fraudsters are continually looking for new vectors of attack. UK Finance’s 2021 Fraud Report showed that fraud losses on UK issued cards totalled £574.2 million in one year alone. To counteract such fraud, card issuers and digital wallet providers are deploying biometric fingerprint technology, which itself is evolving year-on-year to offer ever-increasing security levels.

The front-door attack

Fingerprint spoofing is considered a front-door attack on the biometric system.  It involves applying a fake finger, or so-called spoof, to the fingerprint sensor. When biometrics were first introduced on the iPhone in 2014 they did not deploy adequate anti-spoof technology. As a result it took just 48 hours before German hackers, the Chaos Computer Club, announced they had bypassed Apple’s new TouchID system with a fake fingerprint.

Attacks of this kind impact both consumer and industry confidence. As such, defending against this has been at the forefront of the emerging biometric payment card standards. Korean technology giant Samsung recently announced its entry into the biometric smart card space, and anti-spoof technology was at the centre of its story. This positioning reflects the need for added security and peace of mind in fraud prevention.

Anti-spoof: the heart of any biometric system

Anti-spoofing technology prevents fraudsters from defeating the fingerprint authentication process with false credentials. Today, it is used to increase security levels across a range of biometric systems, from smartphones to laptops and airport border control kiosks.

The biometric payment card has a compelling value proposition by bringing the biometric authentication process inside the secure enclave of the payment card’s Secure Element chip. The card’s off-grid nature ensures a much more limited surface of attack, compared with that of a highly connected smartphone. However, the challenges associated with implementing anti-spoof technology on this platform are not to be baulked at. The card has no battery and operates with limited on-board processing power. Without the luxury of the smartphone’s supercomputer-like processor a whole new wave of innovation has been needed.

As card issuers and digital wallet providers start to deploy fingerprint biometric payment cards to consumers, anti-spoofing technology must sit at the heart of their offering.

This can pave the way for a more secure future, from payment to digital and physical access, and to digital IDs and digital currencies.

Striking the balance between security and user experience

It’s clear that anti-spoofing technology must be included by default on biometric payment cards to reduce fraud and instil consumer confidence. But, despite the benefit of its added security it’s crucial to limit any potential impact on user experience. When paying for their shopping, consumers want to know that their card is safe, but more than that, they want to know their payment card will deliver a flawless user experience day-in, day-out.

When it comes to balancing security and user experience on a payment card, new design approaches have been required. The traditional approach to anti-spoof uses Neural Networks and Machine Learning techniques to train an image processing algorithm to detect the subtle characteristics of images captured from fake fingers. This requires an optimised processor and can quickly become impractical in a highly constrained smart card.

A second approach is to increase the security level of the traditional biometric authentication algorithm that matches a user’s fingerprint to the reference data captured during enrolment. This is very much a brute-force approach which, while helping to detect fake-finger attacks, will rapidly degrade user experience.

The optimum approach involves designing the fingerprint sensor, the biometric authentication algorithm, and the spoof detection system together – to all work in unison. Taking such a holistic, grounds-up approach opens up the design of biometric smart cards to new possibilities. Requirements can be met with margin allowing designers to achieve security targets and focus on delivering a flawless user experience.

Ready to fuel digital payment growth

To ensure the continued widespread adoption of biometric smart cards, it is important that all fingerprint biometric sensors are deployed with anti-spoofing technology while being optimised for user experience. Fingerprint biometric cards, when combined with anti-spoof technology allow for higher transaction limits and a faster, more secure transaction experience, while introducing increased obstacles to fraud.

Payment providers save money on fraud refunds whilst also increasing revenue thanks to higher limits and an enhanced customer base due to a secure and trusted reputation. The payment industry is already at a high level of security today. But with financial fraud on the rise, we must constantly improve to be ahead of cybercriminals and improve the customer experience for those using biometric payment services to enhance their lives.

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Banking

Digital Banking – a hedge against uncertainty?

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Ankit Shah, Head of Digital Banking, Apex Group

 

The story of the 2020’s thus far is one of crisis. First the world was plunged into a global pandemic which saw the locking down of people and economies across the world. Now we deal with the inevitable economic consequences as currencies devalue and inflation bites. This has been compounded by Russia’s invasion of Ukraine and subsequent energy politics.

And the outlook remains uncertain. Tensions continue to build between China and Taiwan and inflationary conditions are forecast to continue well into 2023. This uncertainty is impacting everyone, and every sector. And finance is no exception with effects being felt everywhere from commodity and FX markets to global supply chains.

But it’s not all doom and gloom. Rollercoaster markets and an ever-evolving geopolitical situation have made 2022 a tricky year far, but, despite the challenges, digital banking has proven resilient. In fact, the adoption of digital banking services has continued to grow over the last few years, and is predicted to continue.

So, what are the forces driving this resilience?

In an increasingly digital world and economy, digital banking comes with some advantages baked in, which have seen the sector continue to succeed despite the tumult in the wider world. In fact, the crises which have shaped the decade so far may even have been to the advantage of digital banking. Just as during the pandemic, technologies which could facilitate remote working saw a huge uptick in users, so to digital banking is well suited to a world where both people, and institutions demand the convenience that online banking services offer.

And while uptake of digital banking services is widespread amongst retail consumers, a trend likely to continue as digital first generations like Gen Z become an ever-greater proportion of the consumer market, uptake amongst corporate and institutional customers has been slower. This is largely down to a lack of fintech businesses serving the more complex needs of the institutional market, but, in a post-Covid world of hybrid working business, corporate clients are looking for the same ease of use and geographic freedom in their banking that is enjoyed by retail consumers.

This is not just a pipe dream – with the recent roll out of Apex Group’s Digital Banking services, institutions can enjoy the kind of multi-currency, cloud-based banking solutions, with 24/7 account access that many of us take for granted when it comes to our personal banking.

Staying compliant

One significant difference between retail and business accounts however, for banking service providers, is the relative levels of compliance which are needed. While compliance is crucial in the delivery of all financial services, running compliance on multi-million pound transactions between international businesses brings with it a level of complexity that an individual buying goods and services online doesn’t.

For digital banking services providers, this situation is further compounded by guidance earlier this year from HM Treasury – against the backdrop of the Russia-Ukraine conflict- requiring enhanced levels of compliance and due diligence when it comes to doing business with “a high-risk third country or in relation to any relevant transaction where either of the parties to the transaction is established in a high-risk third country or with a sanctioned individual.”

So, can digital banks meet these standards while also providing institutions with the kind of easily accessible, mobile service which retail customers enjoy?

The answer is yes and again, once initial hurdles are overcome, digital banking brings with it features which give it the edge over traditional banking services. Paperless processes, for example, mean greater transparency and allow for better and more efficient use of data. This means AI can be employed to search documents, as well as provide verification. It also means compliance processes, often notoriously complicated, become easier to track. Indeed, digitising time intensive manual process means the risk of human error in the compliance process is reduced.

Digital banking can also better integrate transaction monitoring tools, helping businesses identify fraud and irregularity more quickly. This can be hugely important, especially in the times of heightened risk we find ourselves in, where falling foul of a sanctions regime could have significant legal, financial and reputational consequences.

Cross-border business

Our world is increasingly globalised, and so is business. For corporate and institutional banking customers, being able to operate seamlessly across borders is key to the operation of their business.

This brings with it challenges, which are again compounded by difficult geopolitical and economic circumstances. In recent weeks for example, we’ve seen significant flux on FX markets which can have real consequences for businesses or institutional investors who are buying and selling assets in multiple currencies and jurisdictions. The ability to move quickly then, and transact in a currency of choice, is vital. Advanced digital banking platforms can help – offering automated money market fund sweeps in multiple core currencies to help their clients optimise their investment returns and effectively manage liquidity.

Control admin uncertainty

In times of uncertainty, digital banking can provide additional comfort via customisable multi-level payment approvals to enhance control of what is being paid out of business accounts, with custom limits available for different users or members of a team. Transparency and accountability are also essential, with corporate clients requiring fully integrated digital reporting and statements and instant visibility with transaction cost and  balances updated in real-time.

Outlook

For some, the perception remains that digital banking is the upstart industry trying to offer the services that the traditional banking industry has built itself upon. Increasingly however, the reality is that the pressure is on traditional banks to try and stake a claim to some of the territory being taken by digital first financial services.

With a whole range of features built in which make them well suited to business in a digital world, digital banking is on a growth trajectory. Until now, much of the focus has been upon the roll-out of services to retail consumers, but with features such as automated compliance, effortless international transactions and powerful AI coming as standard for many digital banks, the digital offering to the corporate world looks increasingly attractive.

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