By Paul Randall, Executive Director from credit risk management experts Creditinfo
According to the World Bank’s Global Findex Database 2017[i], 69 percent of adults worldwide have an account, either with a financial institution (i.e. bank account) or a mobile money provider. Financial services are the bedrock of a nation’s economy, funding and providing access to other critical services including health, education, entertainment and business. Yet the stark reality is that 69 percent is too small a number. A whopping 1.7 billion adults across the globe remain ‘unbanked,’ with no bank accounts and no access to formal finance.
Most, if not all, of these unbanked individuals live in the developing world, in regions such as Africa, India and China. What’s more, an additional 200 million micro-, small- and mid-sized businesses in growth markets lack access to savings and credit, according to a recent McKinsey report[ii]. A lack of banking infrastructure in these developing markets has led to significantly lower numbers of formal finance. This lack of formal finance creates a poverty trap that is hard to climb out of. Poor people around the world are relying on cash to pay their utility bills; budding entrepreneurs are overlooked for loans because of a lack of credit history.
But the outlook needn’t be so bleak. The good news is the unbanked population is slowly diminishing. But how can we close the financial inclusion gap even more swiftly, on the road to universal financial access in the not too distant future? The answer lies in the innovation that both incumbent and emergent fintech companies are bringing to the credit risk management table.
By changing current approaches to credit lending, and providing those with lending power with a new mentality, and the infrastructure required to make better decisions, we can tap into an unbanked and underbanked population to the benefit of economies globally. Here, we’ll take a look at what this road to financial inclusion looks like in reality, particularly for developing regions such as Africa – and it’s more practical, achievable and realistic than you might initially think.
Potholes in the road to financial inclusion
Consulting firm Accenture has estimated that bringing unbanked adults, as well as businesses, into the formal banking sector could generate about $380 billion in new revenue for the financial services sector. With $380 billion to gain, why wouldn’t players in the industry want to unlock that potential?
A report by the World Bank[iii]outlined the importance of infrastructure in support of economic growth. This is specifically pertinent for developing markets, where access to infrastructure, or the ability to build a banking infrastructure from scratch, is often just out of reach.
The historical infrastructures designed to manage corporate loans and consumer savings are ill-equipped for the challenges generated by both the substantial increases in volume of credit and the specific requirements of an unsecured lender. This lack of infrastructure is especially poor for the initial risk assessment, where much of the process is manual.
The development of a robust banking infrastructure, underpinned by government and private sector investors and the participation of local and foreign businesses, is imperative in unlocking the huge population of unbanked and underbanked individuals in developing regions.
In a recent blog by The Brookings Institution[iv], a US non-profit public policy organisation, Africa was proclaimed as the continent of the future. For some years now, the World Bank has driven an initiative to promote the installation of credit bureaus across Africa and other developing regions, with a view to facilitating lending to consumers and small businesses.
If you build it, they will lend
The International Finance Corporation’s(IFC) Africa Credit Bureau Program supports economic growth on the continent by providing the advisory services, infrastructure, credit risk management technologies and support to central banks and other private sector stakeholders in order to build a banking backbone that supports increased access to formal lending. Part of this program involves the development and implementation of credit information sharing, supplemented by automated application processing systems so that lenders can make more informed decisions more quickly, and at scale.
These credit bureaus play a crucial role in creating the infrastructure that has been so severely lacking, by allowing banks to make lending decisions based on quantitative models of risk. This means banks and other lenders can provide access to financial services at a lower cost, to more people, while also reducing risk. However, the conundrum in Africa lies in providing access to financial services to individuals who have very little or next to no credit history, thereby making it difficult for those credit bureaus to provide an accurate picture of solvency to lenders.
You can teach an old bank new tricks
“When there’s little information, then there’s little financing,” said Luz Maria Salamina of the IFC.
Traditional lending and underwriting methods typically screen out the huge pool of ‘thin file’ customers that reside in developing markets like Africa. These are customers without a credit history, or one that’s too small for traditional risk analysis. Thin file companies are typically very poor – they’ve been ignored by the formal sector, and as such tend to pay for services with the little cash they have. So, without information on the billions of these individuals currently without access to finance, the financing stops.
Enter fintech disruptors, who are facilitating change in the credit lending industry by helping banks to tap into and use new sources of data that can unlock both the large pool of thin file customers and, by extension, the wider unbanked population. Some of the largest investors into fintech companies are banks, with some mainstream lenders now acquiring, adopting and developing the new technologies that these fintechs have created. What’s more, established, best-in-breed credit bureaus have adopted these fintech techniques, providing banks with a single source of data, whether that’s through a traditional credit file, or a digital file of aggregated data.
These fintech companies have made an excellent job of mining new data sources from social media, mobile transactions and trade data. Amazon is an example of this new way of thinking – the tech heavyweight used its vast data source to lend $1bn to SMEs over the last 12 months. Companies like Amazon have been able to teach banks new tricks when it comes to making better decisions more quickly, particularly when it comes to thin file customers.
Better the debtor you know
Normally, credit histories are a record of a borrower’s ability to pay back debts. Sources of data include banks (does Bob pay his bills on time?), credit card companies (how many credit cards does Bob have?) and collection agencies (has Bob previously defaulted on any debt, such as loans?)The data is combined, an algorithm is applied, and the subsequent report details how likely it is for that particular borrower to pay back or default on debt in the future. As banks and fintech companies join forces to harness innovation, they are unlocking new data sources, which include the new concept of psychometric testing to fill in the gaps on thin file customers. While it’s true that not everyone can currently access credit, everyone has a personality.
There are now new, innovative solutions for credit lenders to measure the risk of potential customers who may have been overlooked for formal finance in the past, by assessing their core personality. Just like credit bureau data, where millions of raw variables are split into segments such as default, early stage and revolving arrears, or credit card performance, so personality data is split into segments in a similar way.
By uniting psychological models with traditional risk analytics, lenders can reduce risk with existing customers and start new relationships with prospective customers, thereby increasing affordable access to financial services products. New data can be created on individuals’ personalities and their likely behaviour, complementing existing risk assessment processes to produce a rounder picture of an individual.The psychometric test can also be expanded to business loans, allowing more companies to start and expand.
Mobile lending as a litmus test for change
Smartphone and mobile money data can also be harnessed to open up the financial services sector to both individuals and businesses in Africa. As an example, Kenya has an intrinsic entrepreneurial spirit, from informal shops and roadside stores to sophisticated web-based start-ups. However, as with other emerging economies, a high percentage of Kenyan start-ups fail within the first three years of operations, with working capital identified as one of the main reasons for failure. Entrepreneurs who previously struggled to obtain formal finance due to a lack of credit history now have an opportunity to benefit from mobile lending solutions.
With the number of African citizens with access to smartphones increasing, start-ups have an opportunity to widen their customer base through a host of digital platforms, reducing the overall overheads, whilst being able to better manage their business, finances and inventory. Over the coming years, we’ll see various regions in Africa benefitting from the growth in mobile lending, with the result being those loan records being stored within credit bureaus.
The World Bank’s goal is that, “by 2020, adults who currently aren’t part of the formal financial system are able to have access…as the basic building block to manage their financial lives.” The road to universal financial inclusion might be peppered with hurdles, but these are hurdles that can be overcome, through collaboration, open-mindedness and a new approach to the credit risk management industry.
Financial inclusion isn’t just about financing businesses and, for the cynics amongst us, creating more debt. It’s about levelling the playing field globally, giving everyone access to the services they require and, ultimately, giving people the opportunity to lead a better life; a chance to climb out of poverty and into a society that is fair and creates ‘wealth’ in its many shapes and forms.
ISO 20022 migration: full speed ahead despite recent delays, says new Deutsche Bank paper
Today, Deutsche Bank has released the third installment in its “Guide to ISO 20022 migration” series, which offers a comprehensive update on the industry shift to the de facto global standard for financial messaging: ISO 20022. This paper comes at a critical time for the ISO 20022 migration, with a number of changes to existing timelines and strategies from SWIFT and the world’s major market infrastructures having been announced this year.
The paper explores the latest developments, including SWIFT’s year-long postponement of the migration in the correspondent banking space. The decision meets industry calls for a delay and also provides ample time to build the new central Transaction Management Platform (TMP) – a core feature of SWIFT’s new strategy that will allow the industry to move away from point-to-point messaging and towards central transaction processing.
It also details the wave of action that has been seen by market infrastructures around the world – with many, including the ECB, EBA CLEARING and the Bank of England, announcing revised migration approaches.
“Now more than ever, with shifting timelines and strained resources, it is vital that banks and corporates alike do not view the ISO 20022 migration as just another project that can be put on the back burner,” says Christian Westerhaus, Head of Cash Products, Cash Management, Deutsche Bank. “The delays in the correspondent banking space, and across several market infrastructures, should not be seen as an opportunity for banks to take their foot off the pedal. The journey to ISO 20022 is still moving ahead at speed – and internal projects need to reflect this.”
The Guide also highlights the implementation issues on the migration journey ahead – most notably surrounding interoperability between market infrastructures, usage guidelines and messaging formats. This is achieved through a series of deep dives, case studies, and points of attention drawn from Deutsche Bank’s internal analysis.
“As this year has proved, nothing is set in stone, “says Paula Roels, Head of Market Infrastructure & Industry Initiatives, Deutsche Bank. “The ISO 20022 migration involves a lot of moving parts and keeping abreast of the latest developments is critical for banks and corporates alike. As the deadlines near, and the ISO 20022 story develops, this series of guides will continue to highlight key points for consideration over the coming years.”
The Psychology Behind a Strong Security Culture in the Financial Sector
By Javvad Malik, Security Awareness Advocate at KnowBe4
Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.
Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.
With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.
Defining Security Culture: The Seven Dimensions
In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:
- Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
- Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
- Cognition: The understanding, knowledge and awareness of security threats and issues.
- Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
- Compliance: Written security policies and the extent that employees adhere to them.
- Norms: Unwritten rules of conduct in an organisation.
- Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.
All of these dimensions are inextricably interlinked; should one falter so too would the others.
The Bearing of Banks and Financial Institutions
Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.
Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.
Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.
Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.
Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?
Towards Achieving Excellence
There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.
By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.
Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.
Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.
Has lockdown marked the end of cash as we know it?
By James Booth, VP of Payment Partnerships EMEA, PPRO
Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.
Has cashless gone viral?
Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.
Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.
More choice than ever before
Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them.
As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z.
Does social distancing mean financial exclusion?
As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.
Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.
There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.
Supporting the transition away from cash
Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.
Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.
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