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WHY IS DIGITAL ‘KYC’ SUPERIOR TO THE METHODS OF ESTABLISHED BANKS?

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Tobias Neale, Head of Delivery at Contis

 

FinTech is an industry of constant change. In many cases, this change has led to wonderful technologies to make the financial lives of consumers easier and more enjoyable.

 

However, companies in the FinTech world have to be rigorous in the pursuit of ‘knowing their customer’. All companies with financial responsibilities must follow the guidelines set out by the FCA (Financial Conduct Authority) whenever they receive a request for an application.

 

It is crucial that FinTech businesses do their utmost to check applicant identities. This helps cut crime, fight fraud, and stops mistakes. Overall, it should help to lower costs and streamline the business operations that consumers can’t see, in order to provide those things they can: Lower costs and better services.

 

This process can be categorised into several different areas, but the four main points are:

  • Risk management
  • Customer due diligence
  • Transactional analysis
  • Potential for product misuse

Most financial institutions use three different stages of gaining the information required to judge an application. These boil down to three different degrees of accessing information:

  • CIP (Customer Identification Programs) – These cross-reference data from an applicant’s official documents with government data in a bid to confirm an individual’s identity. Artificial Intelligence has had a part to play in the security of this process, as self-learning algorithms allow quicker approval.
  • CDD (Customer Due Diligence) – The use of the above analytics combined with a deeper social analysis. This includes using social media as a way of analysing customer transaction data and financial responsibility.
  • EDD (Enhanced Due Diligence) – This combines the use of both CIP and CDD with the added emphasis on decision-makers. Every recordable piece of data around people’s profiles will be compared as to ensure companies are getting the full picture of the individual they are releasing finances to.

It is important that disruptors still use these processes in order to prevent fraud.

This is not only for compliance and security. If FinTech startups are subject to fraud due to inconsistencies in (know your customer KYC) processes they will tarnish their reputation as a secure financial provider. There could be legal repercussions for companies who do not enforce KYC laws.

The majority of high-street banks will use a mixture of human and digital processes in order to confirm identities. The nature of this process has the potential to cause friction as these security steps standing between the customer and their goal. This is something to address and explain, but not to be feared.

The nature of operating systems means that if a customer’s background undergoes a number of speedy checks and does not match the requirements needed to be granted an account, then they will be automatically rejected. However, all customers are given final sign-off by a human, someone who is able to recognise differences in spending patterns over time and apply common-sense on top of ‘computer sense’.

To streamline the time it takes to set-up accounts with digital account providers, FinTechs are using complex software to track digital footprints and cross-reference this with government records to confirm identities. Companies such as Monzo have taken this a step further, requesting an applicant take a video on the device they have used to register in order to confirm their identity. Whilst many still consider these processes to be frustrating, they are significantly quicker than the processes undertaken by the legacy banks.

Innovation within the technology industry should allow electronic KYC to be further streamlined. One example is software such as the one used by digital identity specialists Jumio. Applicants are asked to take a picture of their passport and then a subsequent photograph of themselves winking to confirm that the photograph is fresh.. This is further proof that FinTechs are striving to make the application for accounts/services as easy as possible.

For all of this to happen, FinTechs must operate on software that allows them to control and refine every aspect of the process. An end-to-end platform that is able to handle files of all types in order to verify identity and configure personalised accounts for each application lies at the core of an agile FinTech looking to surprise and delight customers with the ease of passing through required security checks.

It is not enough to only check your customer’s identity once. FinTechs must continually monitor the transactions and withdrawals of their customers in order to catch those accounts that do slip through the net under false pretenses (or get compromised). The use of artificial intelligence has the ability to automate the process by which customers banking habits are monitored and can only be good for the future-proofing of fraud in banking.

The technology on offer to FinTechs now far surpasses the standards set by the established banks of the past. FinTechs must avoid relying on single technologies, and use a mixture of both automated monitoring due diligence with human experience to crack the KYC challenges currently faced.

 

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Banking

MYTH BUSTING THE ROLE OF OPEN SOURCE IN FINANCIAL SERVICES

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Nigel Abbott, Regional Director North EMEA, GitHub

 

There is no denying the financial services (FS) industry is under pressure to innovate. Not only have customer and consumer expectations for digital experiences surged in recent years, but the emergence of nimble and ambitious fintechs have disrupted the market. Yet, despite striving for innovation being table stakes across the industry, FS organisations inevitably face familiar hurdles that slow their progress, including concerns surrounding security, compliance, and the ability to act fast.

Open source is increasingly seen as a route to drive innovation and create new value. The FS sector’s utilisation of open source and the transformative role it can play is accelerating – on paper, at least. According to the recent Fintech Open Source Foundation’s (FINOS) 2021 State of Open Source in Financial Services survey, as many as 80 percent of FS leaders said that innovation, reduced time-to-market and total cost of ownership are factors for FS businesses to consume open source.

Nigel Abbott, Regional Director North EMEA -GitHub

But the reality is these positive adoption figures don’t tell the whole story. The survey also revealed that 75 percent of FS technology leaders said their businesses are either not “open source first”, or that they did not know if they were. Tellingly, less than one in ten (eight per cent) said that their business has put in place policies to encourage open source contribution.

The statistics point towards disparity between uptake of open source and the ability to use it to its full potential. But why?

For me, it comes down to some common myths about the role of open source that need demystifying:

 

Myth #1: There are limits to the innovation that open source can deliver

This could not be further from the truth. All enterprises, including FS companies, rely on open source software to build the best software for their customers, improve infrastructure, and unlock the potential of their engineering teams. Nationwide, for example, has completely redesigned its DevOps processes to respond faster to market changes and keep pace with customer expectations to remain relevant. The impact is transformative when they actively embrace it and participate fully in the open source community, creating a win-win situation for end-users. 

 

Myth #2: Data can be shared without consent 

Quite the opposite. Open source does not require FS businesses to share all their secrets and give away their competitive advantage. Instead, taking an “innersource” approach allows financial institutions to take the skills of developers who are accustomed to using open source tools and brings these inside the company firewall, providing a secure internal platform for working collaboratively on projects.

 

Myth #3: Open source is not secure

The most common misconception is that higher security risks are associated with code being openly available to anyone who uses it. But the open concept is, in fact, one of the biggest security strengths of open source. This is because of the collaborative nature of how code is built. The open source community has a shared responsibility for developing and maintaining secure code, and there is a vast global pool of developers identifying and fixing security issues. Supported by the right tools and processes, open source makes it easier for developers to code securely throughout the entire software development lifecycle, reducing the amount of time and financial investment in delivering secure products. Research from Red Hat found that security is regarded as a top benefit for enterprises using open source.

 

Myth #4: The open source community lacks finance sector contributors

This is untrue. Financial enterprises of all shapes and sizes are prominent participants in the open-source community and lead by example, sharing meaningful code contributions. Challenger banks and institutions such as Goldman Sachs contribute to open source initiatives via FINOS. By opening their code and ideas, FS companies can share lessons and support the whole community – helping them deliver better services and more value to their customers. And crucially, they are advancing a community that they can systematically tap into and benefit from.

Open source is already delivering innovation in the FS sector. But the bottom line is that there is so much extra value it can bring. Unlocking the full potential of open source to effect change does not just require buying DevOps tools. Open source requires organisation-wide understanding and support, a culture of collaboration and a progressive DevOps and governance process to thrive. Only then can it deliver its true value and accelerate innovation.

 

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Banking

2022: THE YEAR THAT BANKS FINALLY CHANGE FOR GOOD?

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By

Toine van Beusekom, Strategy Director, Icon Solutions

 

The more things change, the more they stay the same. Looking back at 2021 – which promised to be the year that the industry realised the full potential of data-driven transactions, instant payments and cryptocurrencies – it is clear that although there is consensus on the direction of travel and the opportunities, progress continues to be hamstrung by familiar challenges.

Banks remain constrained by existing infrastructure and technology, demonstrating that the time for waiting has passed. Now is the time to prioritise the long-term revenue opportunities and build the capabilities needed to realise them safely and quickly.

As we look to 2022 and beyond, seven key trends mean that potential is starting to be translated into action.

 

  1. The rise of agency banking and Banking-as-a-Service (BaaS). Strategy Director – Toine van Beusekom

In 2022, we’ll see the agency banking industry start to catch up with the embedded finance market, and the realisation that payments as a service requires a banking license. At Icon Solutions, we don’t believe that technology is the answer to every question. Hiring a Silicon Valley hotshot seldom solves the root cause of why change is so slow, as tactics without strategy is the noise before defeat.  To effectively transform, the right technology must be coupled with a profound understanding of the business process that translates into a pragmatic, navigable roadmap for change.

 

  1. Toine van Beusekom

    Banks are working out the actual cost of transactions. Sales Director – Liam Jeffs

Banks don’t know their actual cost per payment transaction. 2022 will be the year they find out. And when they do, it will be too high by at least a factor of two. This means scrutiny will shift from change cost to run cost. Consequently, banks will need to understand their payments estate and build a target and transition roadmap to immediately address these unsustainable cost challenges and deliver wider value. 

 

  1. The beginning of the end for core banking. Services Director – Simon Barrows

Any bank that’s been around for 10 years or more (i.e., most) invariably has some form of legacy core banking platform that is no longer fit for purpose. Yes, transitioning to something more suitable for today’s real-time, always-on world is a marathon not a sprint, but banks have been stood pondering on the start line for many years already.

Yet, banks are finally reacting to the starting gun and it’s clear that one size doesn’t fit all. Some banks are spinning up new world architectures, often leveraging cloud-based BaaS platforms and proving it in discrete parts of the business first. Others are de-composing their existing core banking estates, breaking the ‘elephant’ into bitesize chunks to either re-create in new, domain-focussed, micro-services built in-house, or to enable third party BaaS components into a heterogeneous, API-enabled, plug-and-play architecture.

For most banks, these are long, hard, yards of change. But this could be the year that core banking as we know it really begins to change, or good.

 

  1. Impending card-mageddon. Senior Payments Consultant – Louise Shorthouse

Request to Pay has quickly become one of the most talked about initiatives in the payments industry. From Icon’s recent research, it is clear it has the potential to reduce costs, provide real alternatives to traditional payment options and increase visibility and transparency. This promises to change the way we pay.

Take merchants, who have been trying unsuccessfully for years to circumvent card rails to lower costs. Many in the industry see Request to Pay as an opportunity for merchant’s to finally reduce their dependency on payment cards, as the combination of instant payments rails, open banking APIs and Request to Pay services converge to drive consumers towards cheaper account-to-account (A2A) based payment options at the point-of-sale.

Could this be the sign that card-mageddon is heading our way? For banks, aligning technology with a clear strategy will be critical for Request to Pay services to realise their huge potential.

 

  1. Time for some action on leveraging payments data. Senior Payments Consultant – Andrew Ducker

For UK and EU banks, 2022 will see the go-live of ISO 20022 upgrades for the Bank of England’s RTGS, the Eurosystem’s Target2 RTGS, and SWIFT’s platform for cross-border payments. While critically keeping focus on the infrastructure programmes, banks also now need to raise their sights to consider how they can achieve valuable business benefits by making use of the richer and more timely data, alongside open banking opportunities.

Inaction is not an option, with investment is urgently needed just to retain existing business and relevance, let alone generate new revenues or cost savings. The potential use cases for the data are many and varied, spanning improvements to a bank’s own operations and processing, as well as new or enhanced products and services for corporate, SME and consumer customers.

 

Banks will need to create prioritised plans for developing and launching data-enabled services, supported by an effective operating model, new skill sets, and secure availability of the clean data sources to feed the analytics.

 

  1. Money launderers actually getting caught. Anti-Financial Crime Centre of Excellence Lead – Tom Cleaton

The inconvenient truth is that banks are losing the war on financial crime. Criminals are exploiting increasingly sophisticated tactics, customer behaviours are more complex and demanding, regulatory scrutiny is increasing. With the threat of huge fines and reputational damage looming, banks must work smarter to keep up, let alone get ahead.

There are advancements that we expect to see making a significant difference in 2022 enabling banks to find more criminals, faster. For example, machine learning detection algorithms alongside rule-based controls across both fraud and AML have huge potential to cut down on noise and facilitate better identification of potentially suspicious activity. Sourcing and continued management of data will continue to be a key area of focus to drive a more joined-up approach across ‘FRAML’. Cloud deployment architecture and the ability to leverage cross functional data stores will be an enabler for better data management. Improving data quality and currency moving from a periodic batch model to an event-driven approach will support the detection of suspicious behaviour closer to real-time.

This will not only reduce losses and meet compliance obligations, but also better protect end customers and the wider public from the terrible effects of financial crime.

 

  1. Banks embracing low code approach as middle ground. Pre-Sales Consultant – Matt Piper

Banks have become increasingly frustrated with the inflexibility of change and the constrictions that heavy-code platforms put on them, stifling their ability to innovate and serve their customers properly. This is exacerbated by the war for engineering talent which has reached boiling point.

The advent of the ‘low-code’ approach offers an alternative, wherein deployables (such as payment flows, business functions, rules, you name it…!) can be defined and moulded in a highly intuitive, non-code language, often coupled with dynamic graphical representation, and where the code itself is automatically generated, reducing the reliance on engineer resources. This approach has been catalysed by the adoption of domain specific languages (low-code languages that pertain to a specific domain, such as payments).

What does this mean in practice? Well, change is simplified and accelerated. Banks are less dependent on engineering resource. There is increased alignment and transparency between business and IT in what is being built. And banks have the right tools at their disposal as well as the time to focus on differentiating their offering.

 

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