Ben O’Brien, Risk Practice Director, Jaywing
The direction that IFRS 9, the much awaited legislation for financial assets, took was born out of the recent financial crisis. Existing legislation had allowed lenders to postpone recognition of credit losses and this may have contributed to the slow fiscal recovery.
IFRS 9 provides a unifying approach to classification and measurement of financial assets and changes to hedge accounting rules but the most significant change for UK lenders surrounds the treatment of loan impairments. IFRS9 will replace the IAS 39 model with a forward-looking view of expected loss so that losses are recognised much sooner. The legislation itself presents lending organisations with the challenge of calculating a lifetime view of their customers’ future losses, before they have been incurred, and comes in to effect on 1st January 2018.
There are many factors to consider when implementing the new IFRS 9 requirements. However, despite perceived complexities to navigate, the process can be broken down into nine manageable steps:
- Interpret standards and guidance
The first tip is to build a collective interpretation of the IFRS 9 standards across Finance and Risk departments. Guidance is offered by Guidance on Accounting for Expected Credit Losses (GAECL) that provides useful insight into the deeper implications of the regulation. However, interpretation work must be underpinned by strong ties between the risk and finance worlds, given the wide reach of the new regulations.
After the standards have been interpreted, the next step is to establish a set of requirements for your organisation. Many of these requirements can be addressed by harnessing tools already available within financial institutions, although there is likely to be gaps that need filling before a fully compliant solution can be produced. By measuring the requirements against existing capabilities, gaps can be identified against the requirements the standards will have on your business. Knowing these requirements will also provide a foundation for the remainder of the project.
- Asses current state, historical data and existing risk models
The many references to using existing credit risk tools means it is important to conduct a thorough examination of your existing data, system and model infrastructure for suitability within a forward-looking expected loss model.
There are two fundamental steps in conforming to the standards. One of these is understanding the implications of historical data and reporting system, while the other is comprehending how the existing risk models suite can be leveraged to solve IFRS 9.
Shortfalls in the data infrastructure can be pinpointed through early assessment.This allows time to engage the business to organise and implement changes.
Quality of data is one of the most important factors in the quality of a model. Given that stage allocation requires measuring change in credit risk from origination, data gaps or inconsistencies may exist for some assets. Questions are also raised on how far back historically, and with what level of assurance, origination data spans? This is where an audit is necessary. It should uncover issues that result in a wider project to enhance data infrastructures as part of a longer-term vision for financial organisations.
Not everything needs to be done from scratch and some organisations will have existing IRB models built on a one year expected loss outcome. Not having this means leveraging existing risk models or building new models to forecast loss over different outcome periods. Therefore, ensuring definitions or assumptions made during the model development are compatible with IFRS 9 is vital.
Long-term forecasts of expected loss are what IFRS 9 is looking to promote – aligning this process by using stress testing and loss forecasting outputs to drive IFRS 9 lifetime expected loss is key to success.
Businesses should also be aware of credit loss forecasting models that have methodological differences from other credit risk models. Given that a forward-looking five-year view is similar to lifetime expected, then forecasting, stress testing and IFRS 9 processes should be aligned, underpinned by the same models.
- Develop your methodology
A natural next step from identifying the gaps between requirements and capabilities is to identify ways of addressing these gaps. There may be a single methodology or, more likely, an organisation will need multiple methodologies across different asset classes or portfolio segments. What is important is finding the right methodology to suit your organisation. Existing methodologies may not solve the problem, so sometimes alternative approaches need to be explored and the rationale behind methodological choices explained.
- Work up a prototype model and assess initial impact
Once methodologies have been identified, then modelling can begin. Without a concrete methodology then a full-blown modelling project may not be the most efficient course of action.
This is where prototype models come in as they enable the pros and cons of multiple methodologies to be identified in a manageable time frame. In many model developments, particularly with new methodologies, there will be unexpected challenges. Therefore, prototyping helps highlight any issues and facilitates remediation early on. This approach also helps approximate the framework required for an end-to-end solution. This is vital information for planning for implementation and testing.
Another advantage of building prototype models at the beginning of the process is that they provide early estimates of the provision figures under the new regime. It is expected that provision cover will generally increase under IFRS 9 but getting an early view of the magnitude will help manage expectations with senior management ahead of full implementation in 2018.
- Refine your methodology
Once the methodology and prototype are in place, reviewing figures from stage four may uncover issues with provision adequacy or stability. These issues can be addressed by revising the modelling approach, so it’s important to have the opportunity to refine the model methodology. If multiple methods are being researched, a quantitative and qualitative assessment will facilitate the selection of the optimal method for the business. These actions provide a good foundation before moving into the critical final stages of the wider project.
- Pay attention to your final modelling
Modelling should adhere to already established standards to ensure they are robust, predictive and relevant. The data inputs must prove to be representative of the portfolio prior to commencing any development.
It is widely touted that adherence to IFRS 9 will result in a suite of models across multiple portfolios. In my view, planning and preparation is key to avoiding over-engineering the solution and leaving a model legacy that is difficult to maintain. It is clear that modelling is a core component of the project. Businesses should keep records of the model development processes that have been followed as this is critical to developing a fully compliant solution that concludes with audit and Prudential Regulation Authority (PRA) approval.
To ensure acceptable performance during validation, organisations should include the level of acceptable discriminatory power, stress testing and backtesting criteria and thresholds and any other relevant validation standards.
- Model Governance
Fundamental to a successful process is a final model that has undergone appropriate independent validation and challenge. Comprehensive model documentation is critical to demonstrating compliance.
The documentation should include information around the methodologies employed and judgements made throughout the process. It should also describe the model development journey in the agreed model documentation format. The regulators will view the model documentation as evidence of compliance to the IFRS 9 Standards, so investing time in producing high quality documentation is paramount.
Also essential is independent validation of the modelling approach. This will be obtained during the course of the development and comply with agreed model governance standards.
- Implement and test
Development and approval of the models is not the end of the journey. Models must fit within a system and run alongside IAS 39 models for at least one year. This is long but proves that the implementation is correct and also allows financial institutions to demonstrate adequacy and stability in the provision estimates.
At this stage, the structure of the financial reports should be agreed and the means to populate these reports automatically from the model estimates developed.
- Monitor your model
Demonstrating that the models are predictive and stable at development stage is only the first step in validation of the lifespan of a model. The models will also need regular monitoring.
This is challenging as lifetime expected loss models have complexities that need to be considered early in their development. A framework is needed that ensures models continue to meet both IFRS 9 and internal standards in the longer term. By following the above steps and putting the time in to develop the right processes from the start, the necessary requirements can be met effectively.
The value of digital identity in payments
By Vince Graziani, CEO, IDEX Biometrics ASA
In ever more challenging times, the payments industry needs to maintain trust by finding a way to protect consumers from the constant threat of payment fraud and theft. Consumer’s wishing to limit physical contact during the current pandemic has led to the popularity of contactless payments which has accelerated in multiple territories.
In the US, one in five shoppers have made a contactless payment for the first time during the pandemic according to research published in August by the National Retail Federation and Forrester. The bad guys have unfortunately taken note. This has led to a real need for the industry to fight back with enhanced security.
At the 2019 Money2020 Europe conference, there was a universal call for a comprehensive form of digital identity (ID) to enable digital payments. A form of digital identity that would make cashless payment interactions – secure, intelligent, efficient and private. The feeling was unanimous: without functioning digital ID, the payments revolution will stall.
Unlocking the payment ecosystem
In an increasingly connected world, consumers find themselves needing to authenticate their identity daily. Whether that be with financial institutions, retailers, government departments or healthcare providers. Yet, it is rarely known where consumer data is stored, how secure it is or how it may be traded. Privacy regulations such as the European Union’s General Data Protection Regulation (GDPR) have attempted to restore some trust, but the industry still has a way to go.
Currently, authentication is fragmented and unwieldy. It requires a mix of hardcopy documents, online login credentials and digital wallets. This is not only frustrating for consumers but leads to the reuse of passwords and PINS that make the user vulnerable to fraud. Mastercard believes there is a clear need for a verified identity that is accepted globally and across multiple digital touchpoints and doesn’t involve aggregating more information in potentially vulnerable data stores, but instead gives the individual control over their identity data.
An integrated digital ID scheme would enable the payments industry to fight fraud on a global scale. It would also meet the pressing need for a payment authentication system that consumers can access anytime, anywhere, and on any device. This joined-up approach is vital to ensure no consumer is left behind as the world continues its digital transformation.
Providing access to a singular, unified digital ID will not only streamline the identity process, but also unlock new and enhanced consumer experiences during this digital transformation. Particularly in the new breed of smart buildings and cities, where everything from travel to payment systems will be connected to a user’s identity.
What form should our digital ID take?
While the need for digital ID is well established, the form it will take is less clear. There are two main challenges that payment providers need to overcome with a potential new identity solution: onboarding new users and ensuring the digital ID is compatible with all transactions.
Placing individual consumers at the centre of their own digital interactions will ensure confidence and broader adoption of new technology payments and services. Yet, for this to be successful, the payments industry must adopt a process that is simple, familiar and easy to understand.
Fingerprint biometrics as a digital identity
The use of fingerprint authentication to unlock a smartphone is now deeply entrenched. As far back as 2016, 89 percent of users with compatible iPhones were using fingerprints to unlock their devices. The solution for a frictionless onboarding has been at our fingertips the whole time.
Payment providers can incorporate fingerprint biometric sensors directly into their new breed of smart payment cards. A biometric payment card may be a new concept, but payment providers and retailers across the world are already using contactless card technology in the payment process, so it is the next logical step. Consumers are now used to carrying a card and tapping it for contactless payments. Plus, as we have seen, consumers are used to using their fingerprint as an authentication mechanism. Perhaps biometric cards could be the catalyst for financial inclusion desired by the World Bank, as they don’t require the ownership of expensive smartphones in developing nations.
Building a chain of trust with biometrics
Continuous developments in payment regulation mean that secure authentication is imperative. Under the second Payment Service Directive (PSD2) European banking regulation, all payment transactions will soon require Strong Customer Authentication (SCA) to validate users at the point of transaction to reduce fraud and increase security for customers. SCA requires two forms of authentication for every transaction above the contactless limit. While one is generally something you have like a smart card, the second can be something you are like a fingerprint. Using a fingerprint means that it can be used across multiple platforms and is always at hand. There should be no trade-off between convenience and privacy and fingerprint biometrics delivers on that expectation.
Biometrics can play an essential role in digital ID, significantly limiting exposure to potential fraud and criminality. The addition of a biometric sensor onto a payment card creates a secure ‘chain of trust’ that indelibly connects the user to the card. Furthermore, digital ID has the scope to be extended far beyond payments and used as a unique identifier in areas such as access, government ID and even across IoT devices.
Securing the future of the payments industry
While the world is becoming ever more cashless, commentators and analysts all agree – without a fully functioning digital ID, the payments revolution will stall. As Tony McLaughlin, Emerging Payments and Business Development at Citi put it recently: “If we fix digital identity, we fix payments”. I couldn’t agree more. Both consumers and the payments industry need a user-centric digital ID that is owned and managed by the individual, so they can unlock the full advantages of a transformative digital payment ecosystem.
Using fingerprint biometrics as a digital ID in a payment card will transform the way people authenticate transactions. This integration would enable consumers to confirm their identity wherever they are, on any device, and across every transaction. It will change the face of digital identity as we know it.
We believe that digital interactions should be privacy-enhancing, secure, intelligent, and efficient. To facilitate this, consumers require a user-centric digital identity that is owned, managed, and controlled by the individual. It is time to place individuals at the heart of their digital interactions globally.
It’s time to press ‘reset’ on travel and expense processes
By Rudy Daniello, EVP of Corporations, Amadeus
Travel & Expenses(T&E) is a large spend category for companies across the globe. In fact, for many firms, T&E is the second largest indirect spend category. While we all know the inherent value personal, face-to-face meetings bring, it’s important to quantify and manage the cost, especially in today’s climate.
While business travel has slowed due to COVID-19, many companies have accelerated their digital transformation during this period, especially in the way their teams work. One area that is under the spotlight as organisations look to transform digitally and control costs and processes better, is T&E.
Poor business travel spend management can frustrate staff, and lead to cost and productivity inefficiencies. Within the context of COVID-19, controlling T&E spend is likely to be even more important, so companies need a clear strategy around their travel and expenses.
To understand how organisations were assessing their T&E at this extraordinary time, Forrester Consulting conducted research on behalf of Amadeus, surveying more than 550 key decision makers involved in T&E solutions at large organisations worldwide.
The report, titled Digital Transformation For Travel & Expense: Balancing Process Efficiencies, Compliance, And Employee Experience highlights the challenges organisations face as they assess their T&E systems and processes before business travel picks up again.
The good news is that nearly three quarters (74%) of respondents agree that the improvement of T&E management processes and tools is critical to reducing costs, increasing efficiency, improving employee engagement, and forms part of their digital transformation.
All of these factors are key business objectives, so how can organisations address their T&E?
Focus on Systems
The research found that a lot of organisations are still relying on outdated systems to manage their travel and expenses. More than one in five (22%) of centralised companies still use spreadsheets to track expenses and just 15% of organisations use a cloud-based T&E solution.
Many decentralised companies also still rely on manual processes – either fully or partly – for their T&E. These outdated processes and systems add pressure on staff, managers, auditors and accountants. Reassess T&E Processes
Having the right systems in place will help rethink T&E processes, from researching hotels and appropriate transport, to making expenses claims post-trip. Travel managers surveyed difficulties around compliance-related expense tracking, reconciliation and auditing as a key challenge.
Three quarters (74%) of travel management leaders want to increase automation to reduce their reliance on manual processes. However, one in five (20%) organisations do not feel they are getting the analytical and reporting capabilities they need, despite data being a core priority.
The research shows that Human Resources (HR) and IT have key roles to play in redefining their organisations’ T&E processes.
Enable Smarter Booking
The research also finds that T&E leaders want to be able to manage the huge amount of content out there so that they can make clear decisions when making travel bookings. Multinational organisations need a global solution so that they can access the best deals and make more informed business travel booking decisions.
Integrated T&E solutions deliver cost and efficiency benefits
According to the research, those organisations that use an integrated T&E tool are much less likely to receive complaints from their traveling staff. More than a quarter (27%) of organisations that use an integrated T&E solution reported zero complaints from employees.
Integrated T&E solutions are essential for companies as they help their employees, take advantage of the best offers for the business trip. They also streamline expense processes, making it quicker and easier to claim and have their expenses approved and paid back.
Firms that do not have integrated T&E solutions report a 29% increase in delays in reimbursing expenses. Almost all (96%) of organisations interviewed that use integrated tools are satisfied with their T&E processes. Nearly three quarters (73%) of them even plan to expand or upgrade further.
Improving T&E is a team effort
What the Forrester Consulting research demonstrates clearly is that there is consensus across the board that T&E systems and processes can be improved.
Three quarters (74%) of IT leaders are focused on improving end-to-end experience of T&E processes, and 73% are committed to improving integration between T&E tools and other systems (73%).
And it’s not just IT leaders who see the value in integrated T&E solutions. More than four out of five procurement managers see improvement of T&E tools and processes as a key part of their organisation’s digital transformation, the highest of any group interviewed by Forrester.
While online conferencing has become the norm for many organisations, nothing can replace the value of face-to-face meetings. When business travel picks up again, companies with integrated T&E systems and processes will quickly see the benefits.
Covid-19 and the rise of remote payment fraud: how do we catch a digital thief?
By Evgenia Loginova, co-founder and co-CEO of Radar Payments
Covid -19 is finding different ways to hurt our finances – and like the virus, the threat is invisible.
Each time we tap our payments cards or make a purchase online, there’s always a risk of getting caught out by a digital fraudster. Yet during the global pandemic, the issue has not only escalated, but the ways in which people are conned have changed to reflect new social distancing and lockdown behaviours.
Indeed, the crisis has transformed the way we buy and shop – and those that are being targeted most are the millennial generation.
What are we doing differently?
It’s all down to the way we are interacting with service providers.
Since the World Health Organisation issued a pandemic in March, global payment fraud went up 5% with 100 million suspected fraud attempts from the period between March – April.
According to TransUnion, the firm analysing the data, billions of people around the world have been forced to spend time at home, which has led to industries such as financial services, ecommerce and healthcare to experience disruption in ways that have not been seen for generations.
This is due to the spike in online transactions, as more people adjust to the new normal of spending less time at the shops and more time doing everything on their digital devices. And with so many transactions shifting online – fraudsters are spending more time there too. These culprits are fully remote and are always on the lookout for vulnerable victims – as well as vulnerabilities within the payment systems.
Digital savvy criminals
Businesses that come to grips with the problem will manage to stay afloat – but they won’t be able to do it without fraud prevention tools that can identify suspicious activity without adding friction to the customer payment experience. In other words, customers must be protected from theft – as well as the truth. They shouldn’t even know that they’re under attack in the first place. It’s all about prevention- or at least as much as what technology can provide.
Without some technological intervention, there won’t be prevention, as companies simply cannot keep up with the proliferation of digital thieves. Culprits are operating individually or in criminal gangs or both – and usually in countries that are often forgotten by global leaders. For example, the telecommunications sector witnessed a 76% increase in card fraud a month after the global pandemic was declared – and the top country for suspected fraud origination was Timor-Leste – how many people even know where that is? (East Timor – formerly part of Indonesia, if you must ask!). Financial services saw an 11% increase in identity theft that same period – with most suspected culprits based in war torn Syria.
Despite their location, fraudsters are quickly adapting to consumer behaviour, and finding ways to attack. With less in-person transactions taking place, criminals are doing things like infecting online points-of-sale with malware that enables them to skim credit card details of previous customers.
From our experience with our fraud detection networks the numbers point out that missing card fraud, in particular, has shot up by 70% over the past few months. This is where people’s card details are being used by criminals to make purchases, when they are not in possession of the card. They’ve just stolen the numbers and additional critical security information such as expiry date and CVC2/CVV2.
Identity theft is also on the rise, as well as phishing and social engineering attacks. For example, in the UK alone there’s been a rise in criminals impersonating trusted organisations like the NHS or HMRC to trick people into going online and paying for services that are fake or giving away their money and information to charities and other organisations that are fake.
Local councils in Britain have noted a 40% increase in reported scams since the start of the pandemic, while Citizens Advice believes one in three people have been targeted by a Covid scammer.
This is a problem that is too big to ignore. The moment the fraudsters have your payment details – whether they’ve stolen it or you’ve given it to them under false pretences, the problem leads to losses for the victim and the businesses and organisations too.
With Covid and lockdown, fraud has gone fully remote and everything from e-commerce and digital banking has been a target for abuse.
In this ‘new normal’ world we find ourselves, the prevention of suspicious transactions through customer profiling and enhanced analytics, use of AI and machine learning models becomes very important.
Fortunately, digital theft is now being taken seriously. Spending on security has skyrocketed in recent years, and the sector supplying protection predicted to grow by $6 Trillion by 2021.
Businesses that survive the pandemic must be able to anticipate and strive to block 100% of the digital theft they encounter. But to win the war against these online criminals they require a robust security strategy.
Here are some tips to consider.
Security policies should be enforced internally and across payment channels and distributed networks. This includes the core and cloud networks as well.
Security gaps should be closed. A lot of risk can be mitigated by performing regular checks and plugging security holes, settling on a unified security framework based on interoperability, centralising visibility and control, segmenting the network to restrict the fluidity of malware and high performance, and deep integration.
Invest in AI capabilities. Artificial intelligence possesses the sophisticated power to replicate the analytical behaviour of human intelligence, as well as enable decision-making in real time and offer predictive security notifications.
Investing in AI based security systems can significantly reduce digital attacks and spot suspicious activity. The best ones are integrated with artificial neural networks (ANN), which combined with deep-learning models, can speed up data analysis and decision-making. It also enables the network to nimbly adapt to new information it encounters in the network.
Prevent fraud in online and then investigate. It is crucial to stop fraud before it happens. As most of the payments became remote, reaction should be super fast: high-risk transactions should be declined, low-risk passed with no friction and suspicious challenged. This raises the importance of finding the balance between customer experience and risk mitigation as never before. And even with AI and enhanced analytics for complex cases an expert with natural intelligence should be equipped with all needed information for relevant and adequate decision-making.
Digital crime won’t disappear as long as there’s an opportunity that criminals can exploit. As the world braces for a new wave of lockdown measures, businesses operating in the online sphere must remain vigilant and prepare for more attacks – or face losses that could be impossible to recover from during these challenging economic times.
Research exposes the £68.8 billion opportunity for UK retailers
Modelling shows increasing the proportion of online sales by 5 percentage points would have significantly boosted retailers’ revenues during the...
Want to serve your customers better? An effective online strategy is what financial institutions need
By Anna Willems, Marketing Director, Mention A strong online presence matters. Having a strong online presence, that involves social media...
The rise of AI in compliance management
By Martin Ellingham, director, product management compliance at Aptean, looks at the increasing role of AI in compliance management and just...
Simplifying the Sector: How low code can aid digital transformation in financial services
By Nick Ford Chief Technology Evangelist, Mendix From online banking to contactless payments and Apple Pay, it has been well...
Why the Boom is Long Overdue (and Here to Stay)
By Roger James Hamilton, CEO, Genius Group Virtually every aspect of our lives has been taken over by tech, so...
5 Sustainability Lessons That Are Crucial For Business Success
By Michael Stausholm, founder of Sprout World (sproutworld.com) Sprout World is the eco-company behind the world’s only plantable pencil, with...
Why financial brands need to understand consumer vitality
By Carolyn Corda, CMO at data consortium ADARA Our day to day lives have been turned upside down. Office workers have...
Why and how a modern marketing strategy should put customer experience first
By Jim Preston, VP EMEA, Showpad In 2004, the Leading Edge Forum coined the term ‘consumerisation of IT’, defining a...
Leading from the front – why decision makers must embrace automation
By Jeppe Rindom, Co-founder & CEO, Pleo Ask any decision maker at a business about admin and you’re likely to...
Business first, not compliance only is the future for accountants
By Peter Bracey, MD at Bracey’s Accountants. The past few months have underlined the need for better business insight to reduce...