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EMV – fighting fraud on a global scale

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Jeremy-Gumbley

Jeremy Gumbley, CTO, CreditCall

Fraud reduction is one of the primary drivers of the global migration to the EMV standard for credit and debit cards. Crucially, countries that have already made the transition from the old mag-stripe standard to EMV Chip-enabled cards have seen fraud levels reduce dramatically. However, the global nature of the payment chain calls for a global and joined up solution. That means that as long as there are regions that have not fully adopted the standard, such as the US, the ultimate goal of stamping out payment fraud altogether will remain out of reach.

Jeremy-GumbleyAs one of the last major economies to move to EMV, the US has suffered as a result of fraud migrating from EMV-mature markets. Fraudsters are skilled at finding and exploiting security loopholes, and the US market’s continued acceptance of the mag-stripe card to withdraw cash has provided criminals with the opportunity to use cloned cards from other markets. In April 2013, a report from the European ATM Security Team revealed that five European countries had seen an increase in the number of “skimmers” attached to ATMs and other terminals. To skim a card, fraudsters capture data from the mag-stripe on users’ cards, and obtain PIN numbers from miniature CCTV cameras. According to Financial Fraud Action UK, attempts to steal bank cards and PIN numbers at ATMs have tripled over the past year. The cloned cards will then only work in non-EMV countries, which perhaps is why last year saw a reported rise in ATM fraud through skimmed cards across 20 US states according to http://ficousfraudmap.com

Although the EMV spotlight is currently on the US, it is important to note the many successes so far as the industry fights to co-ordinate a synchronised approach. EMVCo, the organisation that manages the EMV standards and associated compliance processes, published its first version of the EMV specifications in 1996. The organisation estimates that there were 1.62 billion EMV-compliant payment cards in use worldwide as of Q4 2012, though adoption rates remain staggered across geographies. Europe has led the way – in parts of the region, 81% of cards and 95% of terminals were Chip-enabled as of Q4 2012. Canada, Latin America and the Caribbean have also made strong progress, with 49% of cards and 79% of terminals meeting the standard. Other regions, such as Africa, the Middle East and APAC have begun the transition, though are still in the early stages.

The varying migration rates are indicative of the many challenges faced along the route to compliance. In particular, there are a number of technological hurdles that organisations must clear. The move affects both hardware and software, including every card payment system, device and application, across a complex worldwide ecosystem. Organisations must modify or replace every terminal and banks need to reissue credit and debit cards.

Merchants are likely to bear the burden of some fraud losses if they continue to take mag-stripe payments, so they are turning to their device manufacturers and integrators to provide the right EMV-compliant technology. To meet this demand, manufacturers and integrators must get to grips with the specific requirements of the EMV standard and navigate the path to a certified EMV solution. This is an intricate process that requires the integration of card readers with EMV Level 1 and 2 Kernels, as well as PA-DSS and PCI DSS compliance.

Another major hurdle is the need for rigorous testing and certification of terminals for them to become EMV-ready. This testing is enforced by EMVCo to ensure a common standard and therefore global interoperability between all the EMV cards and terminals.

This process can be broken down into two separate stages. The first of these is EMV Level 1 and Level 2 testing. Manufacturers must build and test their own devices with the EMV card reader and applications. The second of these stages is that of end-to-end testing. This is a long process that can take up to 16 weeks in an EMV mature market, and covers the integration of the messages from the terminal to the payment gateway and through to the payment acquirer. Both these stages are time consuming and expensive. With resources in short supply, not only amongst manufacturers but within the wider payments sector, a certification bottleneck is a real possibility.

The sheer scale, and therefore cost, of EMV migration might explain the staggered adoption rates between regions. The move to EMV affects the entire payment industry, making it a particularly difficult shift for larger countries such as the US, which must wrestle with a complex payment value chain that spans several time zones.

Industry experts have recently called the benefits of this enormous implementation cost into question. However, to assess the benefit of EMV migration based solely on potential financial losses through counterfeit fraud is to ignore other important market dynamics. In February 2013, federal agents cracked down on a card fraud ring that reportedly amassed at least $200 million using 7,000 fake identities. One concern is that these types of activities fund organised crime and, according to some reports, terrorist activities. In this light, fraud prevention can be considered a matter of global social responsibility.

As EMV becomes a global reality, merchants, integrators, VARs and processors are seeking to navigate a technology shift which is fundamentally changing the shape of the payments landscape. EMV migration may appear a heavy technological burden at the outset. However, the benefits of adoption mean that it will be very costly to those who are left behind.

 

 

 

 

 

 

Finance

Asset-based lending is often called ‘working capital finance’ for a reason…

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Asset-based lending is often called ‘working capital finance’ for a reason… 1

By Alex Beardsley, director at ABL Business.

At the start of lockdown, many businesses went into panic mode, wondering whether they had enough cash in the bank to meet their obligations in the unpredictable future. Thankfully, the raft of government support helped to ease much of the immediate cashflow woes, however, this exercise alerted many CFOs to the need for a more robust way of managing their working capital — both now and in the future.

Prior to the beginning of 2019, I wonder how many businesses had “potential global pandemic” as an immediate threat to be prepared for and managed in the latest iteration of their business plan.

With poor working capital management being the number-one reason cited as cause of business failure around the globe, managing risk via robust working capital facilities should be high on the agenda of any business hoping to ride the current economic storm.

Thankfully, UK Finance may have found the answer to the question: “How do businesses bolster their working capital facilities post-pandemic?”

UK Finance conducted a study throughout the lockdown period that reviewed  the facilities of 20,000 businesses (accounting for 5% of the UK GDP) in the UK using Asset Based Lending (ABL) and Invoice Finance (IF) as a way to manage their working capital. In the context of the lockdown period, much of the focus was on the availability of vital funds, with the government were under pressure to provide quick access to finance to keep the economy afloat.

The results of the study were surprising, stating: “At the end of March, IFABL clients were using 70 per cent of their available funds to support their cashflow, three months later this had dropped to just 45 per cent. In real terms, this indicated the ‘average’ IF/ABL client had headroom of over £250k within existing facilities.”1

This shows that government grants, the Job Retention Scheme, and Government Backed Loans (CBILs and BBLs) provided the working capital breathing space that businesses needed. But more importantly, it shows that the businesses that had working capital facilities in place prior to the pandemic had more headroom in their facilities and were less likely to be in desperate need for cash.

Alex Beardsley

Alex Beardsley

If this isn’t enough of an incentive for every CFO to review the current facilities — and consider the benefits of — Asset Based Lending (ABL), here are some other reasons why it should be considered as a working capital management tool:

  • With ABL, you get a higher availability of cash compared to traditional lending facilities
  • ABL provides revolving working capital on a constant basis, meaning the availability of working capital will increase inline with the growth of your business
  • Usually, ABL facilities carry a lower cost of capital from lenders due to the high amount of security they have over the business assets, and therefore can be a more cost-effective way of borrowing
  • The facility provides more than just an injection of cash at a specific point in time that is then to be repaid out of working capital, further hitting access to cash.

A better way of managing working capital lies in both knowledge of what is available in the market for businesses, and also the particular attitudes towards using finance within a business.

A study in 2014 by Lloyds Bank Commercial Banking highlighted that there was £770bn of untapped assets  nationally — which at the time equated to 48% of GDP. Could it be that working capital management is suffering because UK businesses are unaware of the options available to them when it comes to structured finance, or is it that they are reluctant to use finance at all?

Many businesses refer to the bank for support when it comes to providing working capital facilities — or any finance at all — but in the last few years the alternative finance market has proliferated. There are now a range of specific ABL providers that are more commercial and open to risk than the high street banks, meaning that there is now more choice available to businesses seeking support for working capital management facilities.

Following the pandemic there is going to be an increased amount of debt on the balance sheets of UK businesses and a reluctance from the banking and financial institutions to lend without significant security.

No one can deny that the risks to lenders have increased. Before Covid-19, the likelihood of a ‘pandemic’ was not on anyone’s radar — now it will be the first thing lenders and businesses think of going forward when it comes to making decisions.

Now more than ever, it is imperative that businesses and CFOs assess all of the options available to them when it comes to using finance within the busines to help with working capital management.

Having the right finance facilities in place before the business runs into working capital issues is a sure fire way to ensure that a business always has the cash on hand to meet their financial obligations — minimising the risk of insolvency by being able to meet current liabilities.

1 Source: https://www.ukfinance.org.uk/data-and-research/data/business-finance/invoice-finance-and-asset-based-lending

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Finance

Futureproofing Your Credit Management Now

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Futureproofing Your Credit Management Now 2

By Marieke Saeij, CEO, Onguard

The pandemic has forced a shift in day-to-day operations for the majority of businesses. In particular, finance teams have found themselves attempting to balance long-term growth with the need for resumption of payments from current customers.

Growth depends largely on answering the funding requirements of customers who need finance, while payments rely on customers emerging from payment freezes, often requiring ongoing help. The first half of the year saw digital transformation accelerate under the economic pressures of the pandemic as organisations sough to achieve rapid efficiency gains and underpin business continuity. With so many potential unknowns continuing to affect customers, finance teams must now focus on one critical area – future-proofing their credit management.

This is a critical initiative. Finance and specifically, credit management, concerns the entire organisation and in tough times, will be crucial to survival.

A three-pronged approach is required to ensure growth by transforming credit management for the future. It consists firstly of the implementation of a data-driven strategy, secondly on increasing automation and deployment of artificial intelligence (AI), and thirdly, on retaining the personal touch.

Future-proofing with your data

The advantages of being a data-driven organisation are increasingly appreciated. It is why more than three-quarters (68 per cent) of finance professionals in the Onguard 2020 FinTech Barometer, said their organisation is already undergoing digital transformation.

Credit management founded on data insights can help to reduce the days sales outstanding (DSO) and allow credit managers to create a better understanding of risk profiles. Identifying payment patterns from the data produces better risk analyses and the ability to anticipate trends. The finance team is more rapidly alerted to the first signs that a customer will not pay, for example. Staff can then step in to resolve the situation, approaching the customer to discuss invoice payment. Data analysis will also predict a prospective customer’s expected growth, chance of bankruptcy or payment behaviour. This is not a capability many organisations currently have without laborious use of manual methods.

Once they have these insights, finance departments can better advise management at the strategic level, elevating their role within organisations. But finance professionals’ insights may also help other colleagues. One such example is sharing risk information with account managers, which will allow them to better calculate whether or not to approach a customer for upselling or new business.

Yet despite all the discussion of digital transformation, most organisations still only use a portion of their available business data. This is as true in credit management as any other area. According to the Barometer, only seven per cent of executives think their own organisation is already data-driven. It means the focus in credit management, as in other departments, must be on exploiting an organisation’s existing data riches because this is the most efficient and cost-effective route to becoming data-driven.

Start with your own and move to third-party data when you need to

Businesses should start by using data from their own consumer base, such as their customers’ payment behaviour. This is not only more cost-effective, but risk profiles based on an organisation’s own customers can reveal more about future customers than data from other companies. The risk profile scores based on internal data will therefore have greater predictive value.

External data can be expensive, as pointed out last month (July) by McKinsey, but its use can strengthen an organisation’s own data resources, bringing a wider understanding of the market that makes for better decision-making. An organisation can combine internal and external sources as it evolves to best suits its needs.

The gains from this hybrid approach are tangible and come as enhanced sales, improved products, better finances and more targeted marketing, supplying a better service that boosts satisfaction levels and leads to improved relationships.

Automation and AI

No discussion of future-proofing can take place without consideration of robotic process automation (RPA) and artificial intelligence (AI). RPA automates the hugely repetitive manual tasks in credit management that involve collection and collation of masses of data and divert skilled employees from more valuable work.

AI, however, is the group of technologies with more far-reaching potential, making smart use of all available data. It links everything from CRM and ERP system data, to all the cogs in the order-to-cash process. This includes linking accounts receivables management with data about customer acceptance and e-invoicing. AI integrates these processes, transforming efficiency and delivering new insights through its analytical power. For finance departments it will also link with recognised parties that provide credit information, as well as payment service-providers and an automatic payment processing solution.

This, however, is only the starting point. AI’s predictive capabilities help minimise non-payment risk, support the forecasting of cashflow and advise on follow-up actions. This includes, for example, whether individual customers will respond better to phone calls, or when there is no alternative to commencement of collection proceedings.

Marieke Saeij

Marieke Saeij

Using individual insights based on consumer history, AI can even help identify the best time to contact specific customers. This will this dramatically improve operational efficiency and if customers are approached in the right way, at the right time, will enhance relationships and bolster retention.

The personal touch

Although the future of credit management will hinge on effective implementation of the right technology, the importance of personal relationships must not be neglected. A future in which all contact with customers is automated will soon become unprofitable in credit management, where personal relationships are all-important.

It must be recognised that no two customers are the same and each needs to be taken on their own terms. Although data provides insight into overall payment patterns, it does not reflect the totality of the relationship with the customer. A credit manager, for example, might know that a single call is all it takes to trigger payment from a certain customer. Yet as much as AI will achieve, it still lacks the emotional intelligence to pick up on these kinds of nuances and subtle differences in character that make a difference.

This matters because customers will soon switch providers when service-levels drop or if they start to feel they are just being treated as a number.

One of the ironies, however, is that if an organisation has the right credit management solution, it will understand more about the customer and have a firmer basis for effective person-to-person interaction. If you know more about a customer, saying the right things to obtain the outcome you want is easier. This means finance professionals need to adopt a hybrid approach that combines the best data-driven tools with a heavy degree of personal involvement. This is the most reliable way of ensuring optimal performance, profitability and customer satisfaction.

Conclusion

There is nothing more fundamental to business than getting paid, but times are changing and data-driven credit management is undoubtedly the future. There can hardly be any argument about it. Basing decisions on data insights generates far better outcomes, delivers a substantial edge on competitors and injects agility into a team.

If another global wave of virus-outbreaks or other sudden disruptions strike the world economy, organisations need to be as agile as possible, ready to meet the challenges with credit management that is already future-proof. That requires becoming data-driven and the adoption of proven automation and AI. Yet reliance on technology alone will not guarantee success. Organisations must continue to recognise the importance of human interaction with customers, who may want to see a face or hear a voice when times are tough.

Alongside the implementation of solutions that deliver results quickly and cost-effectively, organisations need a hybrid approach, that uses the best of the conventional world and adapts it to the data-driven future.

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Risk Mitigation vs. Risk Avoidance: Why FIs Need to Maintain Risk Appetite and Not Place All Bets on De-Risking

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Risk Mitigation vs. Risk Avoidance: Why FIs Need to Maintain Risk Appetite and Not Place All Bets on De-Risking 3

De-risking aims to protect financial institutions from the increasing pressures placed by regulators and threats, associated with clients operating in high-risk GEOs and market segments. Agnė Selemonaitė, board member of ConnectPay, states that FIs should not focus entirely on de-risking to mitigate all potentially dangerous prospects, rather strive to continuously improve their tools for risk control and consider dividing the market among banks and EMIs for more strategic risk management across the entire sector

October 22, 2020. The payments sector has always been under the microscope in terms of regulatory compliance. Now, with a number of scandals and compliance discrepancies, financial institutions have responded in a growing trend of terminating accounts deemed high-risk—a process also known as de-risking. While in the risk management space the term describes hedging against precarious exposures, within the payments sector it has become synonymous with avoiding risks.

Since the financial crisis of ’08, FIs have been hit with approximately $36 billion of non-compliance fines. The significant growth corresponds with the ever-tightening AML/CTF rules, as well as the general tendency of policies becoming more and more strict. With a continuously toughening regulatory environment, financial institutions are less inclined to take on dubious clients and would rather eliminate any viable threats than risk getting fined by the regulatory authorities. Agnė Selemonaitė, board member of ConnectPay, emphasizes that while de-risking is necessary, it should not become the basis of the entire approach to how financial institutions tackle risks.

Although de-risking has been gaining traction in the payments sector, it is important to disclose the shortcomings associated with the practice. The case of Malta, a EU country bordering the Mediterranean sea, is a good example of how strict de-risking policies can impact the payments landscape and alter a country’s image on a global scale.

Maltese FIs have been under mounting pressure from the European Central Bank, as well as local regulatory authorities due to a significant number of ambiguous industries thriving in the country. For instance, the gaming sector accounts for 13.2 % of Malta’s overall economic activity. Called out to re-evaluate their risk profiles and strengthen AML and CFT strategies, FIs chose to not risk sky-high fines, rather terminate riskier customer bases. This has pushed many businesses to direct their payments to out-of-country vendors, while Maltese institutions lost trust due to unbalanced de-risking.

“Now, businesses operating in higher-risk markets are hesitant to rely on a single regulatory jurisdiction to mitigate risk exposure in terms of payments security. Yet provider diversification leads to missing out on a number of benefits, for example, potential discounts, offered due to high payment volume associated with a client,” explained Agnė Selemonaitė. “We’ve noticed this tendency amongst our own clients too. Many are being overly cautious and choose to carry out only a small fraction of payments, fearing for things to take a similar turn, as it did in Malta, and become the ones deemed high-risk.”

“However, higher turnover helps to better mitigate client-specific risks. For instance, the more vendors from any given corporate group are onboarded, the more we can learn about the payment behaviors in their industry, and, consequently, introduce better risk controls to prevent ML, TF and other threats to clients’ funds.”

Ms. Selemonaitė notes that hasty de-risking could contribute to other issues as well, like the growth of the shadow market. “The higher number of such accounts are rejected, the more inclined they become to look for alternatives to continue their business,“ she adds. “In a way, de-risking might increase the very thing it aims to mitigate for a more transparent market.”

That is why it is crucial for governments to establish a clear position on where the entire country stands in terms of risk tolerance. “Regulators implement changes that are passed down to them by the government. If the latter clearly communicates their stance beforehand – there is less room for distrust and ambiguity from the business’s perspective too.”

Agnė Selemonaitė, Board member of ConnectPay

Agnė Selemonaitė, Board member of ConnectPay

Selemonaitė argues that FIs should retain a healthy risk appetite and pool more resources into controlling dubious activities, rather than rely solely on de-risking as the basis for risk mitigation. “De-risking is a necessity – we have leveraged the practice ourselves. However, we are more focused on enhancing our overall risk control capabilities.”

She also raises the idea that sharing the market between banks and EMIs may be even more reasonable in terms of keeping risks at bay. “EMIs are more agile and prone to technology innovation, this allows them to have laser-focus on a single sector and become experts on its common threats. Thus deliberate market division creates the conditions for more strategic risk management across the sector.”

According to her, encouraging a dialogue between the regulators, fincrime watchdogs, market players and other institutions is equally important, as they determine the ins and outs of de-risking. Selemonaitė notes Lithuania’s State Tax Inspectorate (in Lithuanian – VMI) initiative as one of the examples of encouraging back-to-back communication: instead of handing out fines for possible compliance violations, they reported them back to the companies and gave a timeframe to address the issues. “In 6 years, this helped cut down on the auditing almost twice, as well as increased general trust in VMI, which rose from 25 to 75 percent, showing just how important it is to maintain a direct line of communication between regulators and regulatees.”

The TMNL initiative in the Netherlands is also a good example of how consistent dialogue can pave the way for more efficient and transparent process control. Following the initiative, banks are working closely with government parties, such as the Ministries of Finance and Justice and Security, to combat threats related to AML/CTF compliance via real-time transaction monitoring network.

“A joint approach on detecting suspicious patterns enables to take a firmer stand towards mitigating risks, emphasizing the point that, essentially, this is a two-way street: further growth and security in the sector depends on both sides’ efforts to keep communication open and transparent.”

Overall, refusing to work with certain customers or markets focuses only on avoiding risks. As she summarized, “the main goal should be not to shy away, but to increase the capacity to control risks on your own terms.”

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