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A risk and control data revolution

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A risk and control data revolution

Peter Irvine, Head of Product, and Gaspard Biosse Duplan, Head of Sales & Trading Product at Acin, a data standards company that enables firms to standardise Risks & Controls, improve efficiency and reduce the cost of their Risk & Control operating model.

Operational Risk, as a discipline in the banking sector, has always struggled with the lack of sufficient, robust and quantifiable data. Data has often seemed to be at the heart of some of its fiercest controversies and challenges.

All this could be about to change with the introduction of a fresh approach to OpRisk data that is anchored in the methodologies of today’s data management revolution. As a result, the value that Operational Risk teams will be able to deliver to their organizations should increase substantially.

Defining “OpRisk data” 

Peter Irvine

Peter Irvine

First, what is meant by the term “OpRisk data”?

Up until recently, the phrase usually provoked thoughts about loss data – the information that firms collect when things go wrong with people, processes, systems, or external events. Today there are several loss data consortiums that collect this information and redistribute it back to firms.

However, the truth is thatOpRisk data – as a category – is much broader than just loss event data in the same way that credit risk data is much broader than just historical loss events.OpRisk data includes the fluctuating metadata of the risk taxonomies,key controls libraries, and operating performance data from the control environments itself, such as risk indicators. Finally, the data collected and produced from the risk and control self-assessments (RCSAs) should also be considered part of this dataset, as a cornerstone component ofthe risk profile view and decision making process. In general, banks are not getting all of the value that they should be out of this information.

Moreover, OpRisks are too often managed “offline”, within the perimeter of each bank. OpRisk data today is now evolving, there is a growing interest and appetite to start consuming external data to introduce a leaner and more dynamic OpRisk management regime.

Understanding the data challenges 

Value generation from theirOpRisk data is being hampered by a few fundamental challenges.

First, this data is often not complete. A firm may suffer from an overwhelming number of risks and key controls – it can be truly burdensome. And yet, best practice risks and controls can be missing from individual business units, and commonalities and relationships between datasets are often ignored.

This lack of completeness is often caused by operating silos – based on geography, business line, or corporate evolution, such as M&A. As a result, banks often struggle to share information and experiences about risks and controls, both internally and externally. For example, a commodities desk may discover a new risk within its business that other trading desks could encounter as well, however we see many instances, when this new risk is not communicated with other teams. Moreover, the finding isalmost never shared with other banks, even though it would reduce systemic risk to do so, making all firms safer.

This failure to collaborate and communicate about Operational Risks and key controls – both internally and externally – has been a significant issue within the global banking industry. Often within firms it can lead to a proliferation of hundreds of controls, as all three lines of defence struggle to manage risk and enhance operational resiliency. Paradoxically, this can result in more risk and less resiliency, as attention and resources are stretched. The rapid trading electronification and interconnectedness of market participants have exacerbated this issue and increased the need fordata-driven industry collaboration to meet the velocity of market environments.

For firms and individuals, this is not just a missed opportunity, the threat posed by this misalignment of risks and controls is increasing as a result of new regulations focused on improving risk culture. The UK’s Senior Managers & Certification Regime (SM&CR) now holds senior executives directly accountable for risk and control failings that happen under their aegis. Today, a risk or control gap can be career-ending. Many other countries are closely watching the UK’s progress with the SM&CR regime and are considering rolling out similar, culture and accountability-focused regulatory frameworks.

Understanding the value of data 

Gaspard Biosse Duplan

Gaspard Biosse Duplan

These issues could be remedied with an improved approach to Operational Risk and key control data. However, there is another important benefit – the enhancing of the ability of the business to deliver value to shareholders, and protect their interests.

OpRiskdata management practices remain at the same stage that Market and Credit Risk practices were 20 years ago. There is a huge amount of value that can be created by applying new data management techniques to the full range of OpRiskdata. Firms could be using a more sophisticated approach, like they did with the adoption of value-at-risk (VAR) measures for Credit and Market Risk.

Through improved OpRiskdata management, boards should be able to see their Operational Risk appetites actually understood and expressed at the business level through more efficient risk and control frameworks. This could lead eventually to a reduction or reallocation in the level of regulatory capital they have to hold, improve operational resilience and open new growth opportunities, at the very least it will improve decision making and make the banking system safer for all.

 Embracing essential change 

To achieve these benefits, banks need to move beyond the mindset that Operational Risk information should not be shared because it confers competitive advantage. Most senior executives and boards are now beginning to understand this, as they are seeing that the benefits of collaborating are significant.

By sharing information through a trusted partner like Acin, they will be able to adopt a best practice set of risks and controls inventories, and in time, gain data that gives them better insight to improve management of their operational risks as new controls are introduced, or new analytics allowing a more predictive use of industry data. The collective intelligence that is then generated through robust data management will transform their ability to manage the business in alignment with their stated risk appetite.

To do this effectively involves creating a common language, a consensus around these risks and controls across the banking industry. Every bank has its own taxonomy, its own set of terms, that are distinct. And yet,all of these banks are talking about the same risks and controls. The language can be standardized, and then banks can link their own terminology to this best practice, so that they can retain their own language, internally.

Leadership is essential to breakdown the silos that inhibit progress, be they business, function  and organisational level.The ‘tone from the top’ needs to be that collaboration will create an organisation which manages its risks better and is more operationally resilient, through improved operational risk data management.

The reward

The reward of better data management through enhanced collaboration – both in the short term and as industry risk and control data amasses over time –will be substantial. Better data will enable the industry to reduce both the likelihood and impact of risks, through improved controls. This helps keep both firms and executives safe from compliance risk, financial risk, reputational risk, for example.

Moreover, boards and C-suite executives who feel more assured that the organisation’s risk appetite is being adhered to are in a better position to consciously take risk, by moving into new products or markets. We believe that with a more effective risk and control framework, firms will be able to seize new opportunities, knowing that their approach is underpinned by best practice, turning their sound Risk & Control Framework into a competitive advantage with investors, for instance. This is already being observed in banks, but also in the Asset Management community.

So, for financial firms, there is much to gain by embracing a new approach to operational risk – an approach that uses tools and techniques generated by the data management revolution, such as collaboration. A more effective approach to risks and controls can transform an organization’s approach to both compliance and risk management, and give it the confidence to evolve through new products, geographies, and technologies.

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ECB launches small climate-change unit to lead Lagarde’s green push

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ECB launches small climate-change unit to lead Lagarde's green push 1

FRANKFURT (Reuters) – The European Central Bank is setting up a small team dedicated to climate change to spearhead its efforts to help the transition to a greener economy in the euro zone, ECB President Christine Lagarde said on Monday.

Lagarde has made the environment a priority since taking the helm at the ECB, taking a number of steps to include climate considerations in the central bank’s work as the euro zone’s banking watchdog and main financial institution.

She is now creating a team of around 10 ECB employees, reporting directly to her, to set the central bank’s agenda on climate-related topics.

“The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves,” Lagarde said in a speech.

She said that climate change belonged in the ECB’s remit as it could affect inflation and obstruct the flow of credit to the economy.

The ECB said earlier on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.

More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.

So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.

“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.

(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Emelia Sithole-Matarise)

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What to expect in 2021: Top trends shaping the future of transportation

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What to expect in 2021: Top trends shaping the future of transportation 2

By Lee Jones, Director of Sales – Grocery, QSR and Selected Accounts for Northern Europe at Ingenico, a Worldline brand

The pandemic has reinforced the need for businesses to undergo digital transformation, which is pivotal in the digital economy. In 2020, we saw the shift to online and cashless payments accelerated as a result of increased social distancing and nationwide restrictions.

The biggest challenge on all businesses into 2021 will be how they continue to adapt and react to the ever changing new normal we are all experiencing. In this context, what should we expect this year and beyond, in terms of developments across key sectors, including transport, parking and electric vehicle (EV) charging?

Mobility as a service (MaaS) and the future of transportation

Social distancing and lockdown measures have brought about a real change in public habits when it comes to transportation. In the last three months alone, we have seen commuter journeys across the globe reduce by at least 70%, while longer-distance travel has fallen by up to 90%. With it, cash withdrawals for payment has drastically reduced by 60%.

Technological advancements, alongside open payments, have unlocked new possibilities across multiple industries and will continue to have a strong impact. Furthermore, travellers are expecting more as part of their basic service. Tap and pay is one of the biggest evolutions in consumer payments. Bringing ease and simplicity to everyday tasks, consumers have welcomed this development to the transport journey. In-app payments are also on the rise, offering customers the ability to plan ahead and remain assured that they have everything they need, in one place, for every leg of their journey. Many local transport networks now have their own apps with integrated timetables, payments, and ticket download capabilities. These capabilities are being enabled by smaller more portable terminals for transport staff, and self-scanning ticketing devices are streamlining the process even further.

Lee Jones

Lee Jones

Ultimately, the end goal for many transport providers is MaaS – providing an easy and frictionless all-encompassing transport system that guides consumers through the whole journey, no matter what mode of travel they choose. Additionally, payment will remain the key orchestrator that will drive further developments in the transportation and MaaS ecosystems in 2021. What remains critical is balancing the need for a fast and convenient payment with safety and data privacy in order to deliver superior customer experiences.

The EV charging market and the accelerating pace of change  

The EV charging market is moving quickly and represents a large opportunity for payments in the future. EVs are gradually becoming more popular, with registrations for EVs overtaking those of their diesel counterparts for the first time in European history this year. What’s more, forecasts indicate that by 2030, there will be almost 42 million public charging points deployed worldwide, as compared with 520,000 registered in 2019.

Our experience and expertise in this industry have enabled us to better understand but also address the challenges and complexities of fuel and EV payments. The current alternating current (AC) based chargers are set to be replaced by their direct charging (DC) counterparts, but merchants must still be able to guarantee payment for the charging provider. Power always needs to be converted from AC to DC when charging an electric vehicle, the technical difference between AC charging and DC charging is whether the power gets converted outside or inside the vehicle.

By offering innovative payment solutions to this market segment, we enable service operators to incorporate payments smoothly into their omnichannel customer experience that also allows businesses to easily develop acceptance and provide a unique omnichannel strategy for EV charging payments. From proximity to online payments, it will support businesses by offering a unique hardware solution optimized for PSD2 and SCA. It will manage both near field communication (NFC) cards and payments from cards/smartphones, as well as a single interface to manage all payments, after sales support and receipt with both ePortal and eReceipts.

Cashless options for parking payments

The ‘new normal’ is now partly defined by a shift in consumer preference for cashless, contactless and mobile or embedded payments. These are now the preferred payment choices when it comes to completing the check-in and check-out process. They are a time-saver and a more seamless way to pay.

Drivers are more self-reliant and empowered than ever before, having adopted technologies that work to make their life increasingly efficient. COVID-19 has given rise to both ePayment and omnichannel solutions gaining in popularity. This has been due to ticketless access control based on license plate recognition or the tap-in/tap-out experience, as well as embedded payments or mobile solutions for street parking.

These smart solutions help consider parking services more broadly as a part of overall mobility or shopping experience. Therefore, operators must rapidly adapt and scale new operational practices; accept electronic payment, update new contactless limits, introduce additional payments means, refund the user or even to reflect changing customer expectations to keep pace.

2021: the journey ahead

This year,  we expect to see an even greater shift towards a cashless society across these key sectors, making the buying experience quicker and more convenient overall.

As a result, merchants and operators must make the consumer experience their top priority as trends shift towards simplicity and convenience, ensuring online and mobile payments processes are as secure as possible.

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Opportunities and challenges facing financial services firms in 2021

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Opportunities and challenges facing financial services firms in 2021 3

By Paul McCreadie, Partner at ECI Partners, the leading growth-focused mid-market private equity firm

Despite 2020 being an enormously disruptive year for businesses, our latest Growth Index research reveals that almost three quarters (74%) of mid-market financial services companies remained resilient throughout the pandemic.

This is positive news, especially when taking into account the economic disruption that financial services firms have had to go through since the crisis began. No doubt 2021 will also hold its own challenges – as well as opportunities – for firms in this sector.

Challenges outlook

Unsurprisingly, the biggest short-term concern for financial firms for the year ahead involved changing pandemic guidance, with 42% citing this as a top concern. With the UK currently experiencing a third lockdown many financial services businesses will have already had to adapt to rapidly changing guidance, even since being surveyed.

Businesses will also be considering the need to invest in working from home operations, and there may be uncertainty over re-opening offices on a permanent basis.  According to the research 30% of financial services firms are planning to adopt remote working on a permanent basis, so decisions need to be made now about whether they invest more in enabling staff to do this, or in their current office premises.

Due to Brexit, UK financial services firms are no longer able to passport their services into Europe, which may cause problems, particularly in the next 12 months as the Brexit deal is ironed out and the agreement is put into practice. Despite this, Brexit was only cited by 24% of financial firms as a short-term concern. While it’s comforting to see that UK financial firms aren’t hugely concerned about Brexit at this juncture, it is going to be vital for the ongoing success of the industry that the UK is able to get straightforward access to Europe and operate there without issue, otherwise we may see these concern levels rise.

Looking ahead to longer-term concerns for financial services businesses, the top concern was global economic downturn, of which 40% of firms cited this as a worry when looking beyond 2021.

Investing and adopting tech

Traditionally, the financial services sector has been slow to adopt digital transformation. Issues with legacy systems, coupled with often large amounts of data and a reluctance to undertake potentially risky change processes, have meant many firms are behind the curve when it comes to technology adoption. It’s therefore promising to see that so much has changed over the last year, with 45% of financial services firms having invested in AI and machine learning technology – making it the top sector to have invested in this space over the last 12 months.

One business that exemplifies the benefits of investing in machine learning is Avantia, the technology-enabled insurance provider behind HomeProtect. The business has undergone a large tech transformation in the last few years, investing in an underlying machine learning platform and an in-house data science team, which provides them with capabilities to return a quote to over 98% of applicants in under one second. This tech investment has allowed them to become more scalable, provide a more stable platform, improve customer service and consequently, grow significantly.

This demonstrates how this kind of tech can help businesses to leverage tech in order to offer a better customer experience, and retain and grow market share through winning new customers. This resilience should combat some of the concerns that firms will face in the next year.

Additionally, half (51%) of financial services firms have invested in cybersecurity tech over the last year, which allows them to protect the platforms on which they operate and ensure ongoing provision of solutions to their customers.

International resilience

Clearly, there is a benefit of international revenues and profits on business resilience. In practice, this meant that businesses that weren’t internationally diversified in 2020 struggled more during the pandemic. In fact, the businesses considered to be the least resilient through the 2020 crisis were three times more likely to only operate domestically.

Perhaps an attribute towards financial services firms’ resilience in 2020, therefore, was the fact that 53% already had a presence in Europe throughout 2020 and 38% had a presence in North America. This internationalisation gave them an advantage that allowed them to weather the many storms of 2020.

Looking at how to capitalise on this throughout the rest of 2021, half (51%) of are planning overseas growth in Europe over the next 12 months, and 43% in North America. Further plans to expand internationally is not only a good sign for growth, but should further increase resilience within the sector.

Conclusion

While there are many concerns, the fact that financial services businesses are investing in technology like AI and machine learning, as well as still planning to grow internationally, means that they are providing themselves with the best chances of dealing with any upcoming challenges effectively.

In order to maintain their growth and resilience throughout the next 12 months, it’s imperative that they continue to put their customers first, invest in technology and remain on the front foot of digital change.

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