By Dr. Hubertus von Poser, executive board member at PPI AG
Processing costs prove expensive for banks engaged in these financial transactions. Credit institutions in the SEPA zone expect total costs of almost 7.5 billion Euro each year. This includes costs for transactions, claims and marketing costs as well as employee salaries. This has been revealed by a benchmark study by PPI and ibi research and by an estimate based on the market expertise of PPI consultants. Many of these expenses can be reduced drastically by limiting the number of physical documents and increasing efficiency of expensive SWIFT payments. Compared to the rest of Europe, Great Britain and Ireland, for instance, still see a very high number of cheque deposits, which are expensive to process. This is because while electronic transfers and direct debits only incur costs of approximately two cents per transaction, cheque deposits and paper-based transfers cost between 28 and 92 cents each. SWIFT transfers costs approximately 4.50 Euro each. Brexit also contributes to increased transfer costs in Great Britain.
Great Britain will find itself in a unique situation as a result of Brexit. As Britain is leaving the EU transfer costs will rise. Universal EU regulations, such as the Payment Services Directive in particular, will then no longer apply. What is more, considerable resources will be tied up in the Brexit project – even at banks. This leaves the financial institutions little room to invest in improving efficiency such as optimising financial transactions, for example. However there are significant savings to be made in this regard as the following cost-report from the study shows.
EURO-based transactions in the SEPA zone
In 2015, there were a total 72.9 billion financial transactions in the SEPA zone. Card payments constituted the majority of transactions at 40.5 percent, with transfers at 20.8 percent and direct debits at 26.1 percent. While the proportion of other transactions including online transactions increased considerably, they only amounted to 4.6 percent. However, 5.6 percent of all transactions still consisted of paper transactions or cheques, resulting in disproportionately high costs. The total expenses for processing of SEPA transfers amounted to 4.99 billion Euro. This includes all staff, resource and IT costs required for processing, the IT infrastructure, and improvements made to these.
The approximately 68.7 billion electronic transactions (transfers, direct debits, card transactions) incur costs of a mere 1.47 billion Euro, an average of around two cents per transaction. Meanwhile paper-based transfer and cheque deposits are the real cost drivers in financial transactions. The 2.66 billion cheque transactions alone which constitute 3.6 percent of all transactions incur a total of 2.68 billion Euro and 53.7 percent of all transaction costs. The two percent of paper-based transfers costs 655 million Euro and make up 13.1 percent of costs incurred. These figures also illustrate where there are savings to be made in SEPA financial transactions. Driving down the frequency of both of these payment methods alone could reduce the cost of financial transactions by around 67 percent.
Cheques still used too often
The number of internet transfers is rapidly increasing, particularly in retail-banking. The number of paper-based transactions is therefore steadily declining. Though in some SEPA countries this feat has been harder to achieve with cheques. The next solution is perhaps to eliminate checks altogether. The implementation of the Eurocheque guarantee in 2001, for example, proved very effective and resulted in a decline in cheque volume. Cheques are almost defunct in Germany (0.1 percent ). In Great Britain and Ireland (United Kingdom) the cheque is alive and well – with its share among financial transactions at around 1.9 percent in 2016. Despite an even higher proportion of cheques being used in France, Malta and Cyprus, this number is too high when compared with the rest of Europe. However it must be noted that the trend is already moving in the right direction in the United Kingdom too: Compared to the previous year, the number of cheques used in financial transactions fell by 0.5 percent. To compare: While in 2002 an average British citizen would deposit 31 cheques a year, by 2008 this number fell to 14. British banks had decided to completely phase out cheque payments by the end of 2018 after a transition period. After a number of objections this will not be implemented, however cheque payment guarantees using a guarantee card were eliminated in 2011.
In total, the 2.66 billion cheque transactions alone, chiefly in France at a total of 3.6 percent of all transactions, amount to 53.7 percent of the 2.68 billion Euro transaction costs. The two percent of paper-based transfers cost 655 million Euro, making up another 13.1 percent of all costs incurred. These figures also illustrate where there are savings to be made in SEPA financial transactions. Driving down the frequency of both of these payment methods alone could reduce the cost of financial transactions by around 67 percent. Although trends suggest that paper-based transactions are on the decline as a result of a rapid increase in online transfers, this feat is obviously far harder to achieve with cheques.
With the introduction of SEPA the number of claims made in the Euro zone has decreased significantly. On average, for every 14,000 payment orders or so, only one results in a claim now. This is especially true of international SEPA refund transactions where the process has become significantly easier. However, processing still incurs total costs of around 190 million Euro, an average of 35 Euro per transaction. The benchmark study revealed that with modern IT infrastructure and targeted process optimisation, costs can be lowered from 60 (worst case scenario pricing structure) to under 20 Euro.
SWIFT financial transactions are on the decline
Financial transactions using the SWIFT platform includes express financial transactions in Euro via Target and Euro and foreign currency transactions within the SEPA zone as well as transnational, classic foreign transactions. The introduction of SEPA has resulted in a significant decrease in the number of SWIFT-based foreign transactions. Previously making up 1 percent of all payment orders, this slipped to 0.4 percent with the introduction of the SEPA initiative. Nevertheless, the costs for the necessary IT infrastructure could not be reduced. On the contrary, an increase in compliance requirements led to a significant increase in costs. And although the majority of banks made no radical upgrades or replacements to their systems for foreign payments and so avoided having to make additional cost allowances per unit, the costs of foreign transactions are still disproportionately high. They amount to 1.8 billion Euro, 24.3 percent of the total cost of SEPA financial transactions (the sum of processing and marketing costs). On average, each order incurs 4.50 Euro in costs. Furthermore, cheque payments which still make up a high proportion of transactions cost 15 to 18 Euro each. It is assumed for Austria in particular that the costs for completing non-SEPA transactions are relatively low as Austria is traditionally a strong performer in this respect, effecting a lot of transactions with Eastern Europe.
Significant costs are also incurred as a result of claims processing. On average, the number of claims makes up one percent of all orders in foreign transfers and so is significantly higher than the number of claims made in SEPA financial transactions. This is partly due to the consistently poor conditions in the banking infrastructure in many developing countries, particularly in Africa and parts of Asia and South America. The average costs incurred per claim are therefore in the 80 to 90 Euro range.
Marketing costs in the millions
There are no reliable figures for Germany or Europe to show the number of employees processing financial transactions. To make a conservative estimate, assuming that there is one employee per credit institution who is exclusively responsible for processing financial transactions, which corresponds to roughly 0.25 percent of the total employees of credit institutions, this would easily result in around 1500 employees. Extrapolating the number in Germany for the whole SEPA zone, this would be a total of 6200 employees involved in processing financial transactions throughout the SEPA zone. If the total costs lie somewhere between 100,000 and 110,000 Euro, the marketing costs will then total 630 million Euro.
Total financial transaction costs
According to a relatively precise estimate, SEPA financial transactions made in Euro amount to almost 5 billion Euro. Payments made via the SWIFT platform add a further estimated 1.8 billion Euro. In addition to this there are the marketing costs which according to a rough but likely all too modest estimate come to at least 630 million Euro. This yields total costs of almost 7.5 billion Euro per year. So we are talking about enormous expenses which could be greatly reduced within a few years by taking measures such as reducing the amount of physical documentation – particularly cheques – and increasing the efficiency of very expensive SWIFT payments. In Great Britain in particular there is potential for cost optimisation in the usage of cheques and expensive foreign payments. Furthermore it is necessary to ensure that in spite of Brexit and its associated costs that arrangements are made to enable the optimisation of financial transactions. This comes down to the financial transaction managers!
About the study:
The estimates are based on PPI’s market expertise and on a benchmark study on SEPA financial transactions in Germany. This study was carried out by PPI and ibi research for the year SEPA was introduced. Eight banks, responsible for around 45 percent of all financial transactions effected in Germany, took part in the study.
On this basis we produced an estimation of the total costs of financial transactions for all banks in the SEPA zone. This includes all SEPA transactions as well as all SWIFT transactions within and those made to outside the SEPA zone, also known as foreign transactions. The costs of SEPA transactions made by non-German banks were estimated based on German figures. National differences and circumstances were also taken into account. The costs of SWIFT transactions were estimated based on the transaction costs of a medium-sized to large bank and then extrapolated for Europe. In addition to this there are the marketing costs for financial transactions for which conservative estimates have been made in the absence of statistical data.
To take the nation’s financial pulse, we must go digital
By Pete Bulley, Director of Product, Aire
The last six months have brought the precarious financial situation of many millions across the world into sharper focus than ever before. But while the figures may be unprecedented, the underlying problem is not a new one – and it requires serious attention as well as action from lenders to solve it.
Research commissioned by Aire in February found that eight out of ten adults in the UK would be unable to cover essential monthly spending should their income drop by 20%. Since then, Covid-19 has increased the number without employment by 730,000 people between July and March, and saw 9.6 million furloughed as part of the job retention scheme.
The figures change daily but here are a few of the most significant: one in six mortgage holders had opted to take a payment holiday by June. Lenders had granted almost a million credit card payment deferrals, provided 686,500 payment holidays on personal loans, and offered 27 million interest-free overdrafts.
The pressure is growing for lenders and with no clear return to normal in sight, we are unfortunately likely to see levels of financial distress increase exponentially as we head into winter. Recent changes to the job retention scheme are signalling the start of the withdrawal of government support.
The challenge for lenders
Lenders have been embracing digital channels for years. However, we see it usually prioritised at acquisition, with customer management neglected in favour of getting new customers through the door. Once inside, even the most established of lenders are likely to fall back on manual processes when it comes to managing existing customers.
It’s different for fintechs. Unburdened by legacy systems, they’ve been able to begin with digital to offer a new generation of consumers better, more intuitive service. Most often this is digitised, mobile and seamless, and it’s spreading across sectors. While established banks and service providers are catching up — offering mobile payments and on-the-go access to accounts — this part of their service is still lagging. Nowhere is this felt harder than in customer management.
Time for a digital solution in customer management
With digital moving higher up the agenda for lenders as a result of the pandemic, many still haven’t got their customer support properly in place to meet demand. Manual outreach is still relied upon which is both heavy on resource and on time.
Lenders are also grappling with regulation. While many recognise the moral responsibility they have for their customers, they are still blind to the new tools available to help them act effectively and at scale.
In 2015, the FCA released its Fair Treatment of Customers regulations requiring that ‘consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale’.
But when the individual financial situation of customers is changing daily, never has this sentiment been more important (or more difficult) for lenders to adhere to. The problem is simple: the traditional credit scoring methods relied upon by lenders are no longer dynamic enough to spot sudden financial change.
The answer lies in better, and more scalable, personalised support. But to do this, lenders need rich, real-time insight so that lenders can act effectively, as the regulator demands. It needs to be done at scale and it needs to be done with the consumer experience in mind, with convenience and trust high on the agenda.
Placing the consumer at the heart of the response
To better understand a customer, inviting them into a branch or arranging a phone call may seem the most obvious solution. However, health concerns mean few people want to see their providers face-to-face, and fewer staff are in branches, not to mention the cost and time outlay by lenders this would require.
Call centres are not the answer either. Lack of trained capacity, cost and the perceived intrusiveness of calls are all barriers. We know from our own consumer research at Aire that customers are less likely to engage directly with their lenders on the phone when they feel payment demands will be made of them.
If lenders want reliable, actionable insight that serves both their needs (and their customers) they need to look to digital.
Asking the person who knows best – the borrower
So if the opportunity lies in gathering information directly from the consumer – the solution rests with first-party data. The reasons we pioneer this approach at Aire are clear: firstly, it provides a truly holistic view of each customer to the lender, a richer picture that covers areas that traditional credit scoring often misses, including employment status and savings levels. Secondly, it offers consumers the opportunity to engage directly in the process, finally shifting the balance in credit scoring into the hands of the individual.
With the right product behind it, this can be achieved seamlessly and at scale by lenders. Pulse from Aire provides a link delivered by SMS or email to customers, encouraging them to engage with Aire’s Interactive Virtual Interview (IVI). The information gathered from the consumer is then validated by Aire to provide the genuinely holistic view of a consumer that lenders require, delivering insights that include risk of financial difficulty, validated disposable income and a measure of engagement.
No lengthy or intrusive phone calls. No manual outreach or large call centre requirements. And best of all, lenders can get started in just days and they save up to £60 a customer.
Too good to be true?
This still leaves questions. How can you trust data provided directly from consumers? What about AI bias – are the results fair? And can lenders and customers alike trust it?
To look at first-party misbehaviour or ‘gaming’, sophisticated machine-learning algorithms are used to validate responses for accuracy. Essentially, they measure responses against existing contextual data and check its plausibility.
Aire also looks at how the IVI process is completed. By looking at how people complete the interview, not just what they say, we can spot with a high degree of accuracy if people are trying to game the system.
AI bias – the system creating unfair outcomes – is tackled through governance and culture. In working towards our vision of a world where finance is truly free from bias or prejudice, we invest heavily in constructing the best model governance systems we can at Aire to ensure our models are analysed systematically before being put into use.
This process has undergone rigorous improvements to ensure our outputs are compliant by regulatory standards and also align with our own company principles on data and ethics.
That leaves the issue of encouraging consumers to be confident when speaking to financial institutions online. Part of the solution is developing a better customer experience. If the purpose of this digital engagement is to gather more information on a particular borrower, the route the borrower takes should be personal and reactive to the information they submit. The outcome and potential gain should be clear.
The right technology at the right time?
What is clear is that in Covid-19, and the resulting financial shockwaves, lenders face an unprecedented challenge in customer management. In innovative new data in the form of first-party data, harnessed ethically, they may just have an unprecedented solution.
The Future of Software Supply Chain Security: A focus on open source management
By Emile Monette, Director of Value Chain Security at Synopsys
Software Supply Chain Security: change is needed
Attacks on the Software Supply Chain (SSC) have increased exponentially, fueled at least in part by the widespread adoption of open source software, as well as organisations’ insufficient knowledge of their software content and resultant limited ability to conduct robust risk management. As a result, the SSC remains an inviting target for would-be attackers. It has become clear that changes in how we collectively secure our supply chains are required to raise the cost, and lower the impact, of attacks on the SSC.
A report by Atlantic Council found that “115 instances, going back a decade, of publicly reported attacks on the SSC or disclosure of high-impact vulnerabilities likely to be exploited” in cyber-attacks were implemented by affecting aspects of the SSC. The report highlights a number of alarming trends in the security of the SSC, including a rise in the hijacking of software updates, attacks by state actors, and open source compromises.
This article explores the use of open source software – a primary foundation of almost all modern software – due to its growing prominence, and more importantly, its associated security risks. Poorly managed open source software exposes the user to a number of security risks as it provides affordable vectors to potential attackers allowing them to launch attacks on a variety of entities—including governments, multinational corporations, and even the small to medium-sized companies that comprise the global technology supply chain, individual consumers, and every other user of technology.
The risks of open source software for supply chain security
The 2020 Open Source Security and Risk Analysis (OSSRA) report states that “If your organisation builds or simply uses software, you can assume that software will contain open source. Whether you are a member of an IT, development, operations, or security team, if you don’t have policies in place for identifying and patching known issues with the open source components you’re using, you’re not doing your job.”
Open source code now creates the basic infrastructure of most commercial software which supports enterprise systems and networks, thus providing the foundation of almost every software application used across all industries worldwide. Therefore, the need to identify, track and manage open source code components and libraries has risen tremendously.
License identification, patching vulnerabilities and introducing policies addressing outdated open source packages are now all crucial for responsible open source use. However, the use of open source software itself is not the issue. Because many software engineers ‘reuse’ code components when they are creating software (this is in fact a widely acknowledged best practice for software engineering), the risk of those components becoming out of date has grown. It is the use of unpatched and otherwise poorly managed open source software that is really what is putting organizations at risk.
The 2020 OSSRA report also reveals a variety of worrying statistics regarding SSC security. For example, according to the report, it takes organisations an unacceptably long time to mitigate known vulnerabilities, with 2020 being the first year that the Heartbleed vulnerability was not found in any commercial software analyzed for the OSSRA report. This is six years after the first public disclosure of Heartbleed – plenty of time for even the least sophisticated attackers to take advantage of the known and publicly reported vulnerability.
The report also found that 91% of the investigated codebases contained components that were over four years out of date or had no developments made in the last two years, putting these components at a higher risk of vulnerabilities. Additionally, vulnerabilities found in the audited codebases had an average age of almost 4 ½ years, with 19% of vulnerabilities being over 10 years old, and the oldest vulnerability being a whopping 22 years old. Therefore, it is clear that open source users are not adequately defending themselves against open source enabled cyberattacks. This is especially concerning as 99% of the codebases analyzed in the OSSRA report contained open source software, with 75% of these containing at least one vulnerability, and 49% containing high-risk vulnerabilities.
Mitigating open source security risks
In order to mitigate security risks when using open source components, one must know what software you’re using, and which exploits impact its vulnerabilities. One way to do this is to obtain a comprehensive bill of materials from your suppliers (also known as a “build list” or a “software bill of materials” or “SBOM”). Ideally, the SBOM should contain all the open source components, as well as the versions used, the download locations for all projects and dependencies, the libraries which the code calls to, and the libraries that those dependencies link to.
Creating and communicating policies
Modern applications contain an abundance of open source components with possible security, code quality and licensing issues. Over time, even the best of these open source components will age (and newly discovered vulnerabilities will be identified in the codebase), which will result in them at best losing intended functionality, and at worst exposing the user to cyber exploitation.
Organizations should ensure their policies address updating, licensing, vulnerability management and other risks that the use of open source can create. Clear policies outlining introduction and documentation of new open source components can improve the control of what enters the codebase and that it complies with the policies.
Prioritizing open source security efforts
Organisations should prioritise open source vulnerability mitigation efforts in relation to CVSS (Common Vulnerability Scoring System) scores and CWE (Common Weakness Enumeration) information, along with information about the availability of exploits, paying careful attention to the full life cycle of the open source component, instead of only focusing on what happens on “day zero.” Patch priorities should also be in-line with the business importance of the asset patched, the risk of exploitation and the criticality of the asset. Similarly, organizations must consider using sources outside of the CVSS and CWE information, many of which provide early notification of vulnerabilities, and in particular, choosing one that delivers technical details, upgrade and patch guidance, as well as security insights. Lastly, it is important for organisations to monitor for new threats for the entire time their applications remain in service.
On the Frontlines of Fraud: Tactics for Merchants to Protect Their Businesses
By Nicole Jass, Senior Vice President of Small Business and Fraud Products at FIS
Fraud isn’t new, but the new realities brought by COVID-19 for merchants, and the rising tide of attacks have changed the way we need to approach the fight. Even before the pandemic broke out earlier this year, the transition to digital payments was well underway, which means fighting fraud needs a multilayered, multi-channel approach. Not only do you want to increase approval rates, you want to protect your revenue and stop fraud before it happens.
A great place to start is working with your payment partners to refresh your company’s fraud strategies with emerging top three best practices:
- AI-based machine learning fraud solutions helps your business stay ahead of fraud trends. Leveraging data profiles to model both “good” and “bad” behavior helps find and reduce fraud. AI-based machine learning will be increasingly essential to stay ahead of the explosive and sophisticated eCommerce fraud.
- Increasing capabilities around device fingerprinting and behavioral data are essential to detect fraud before it happens. While much of the user-input values can be easily manipulated to look more authentic, device fingerprinting and behavioral data are captured in the background to derive unique details from the user’s device and behavior. Bringing in more unique elements into decisioning, can help authenticate the users and determine the validity of the transactions.
- Prioritize user authentication. User authentication is a vital linchpin in any fraud defense and should receive even greater priority today. Setting strong password requirements and implementing multi-factor authentication helps curb fraud attacks from account takeover.
As well as working with your payment partners it’s more critical than ever to protect online transactions while not jeopardizing legitimate purchases. Fortunately, there are a few things you can do right now to address these concerns:
- Monitor warning signs
Payment verification is an important part of protecting your business. There are a variety of strategies to employ including implementing technology utilizing artificial intelligence and machine learning to help catch certain patterns. In addition to technology, here are a few other tips that may serve as warning signs. These are not a guarantee fraud is occurring, but they are flags to investigate.
o The shipping address and billing address differ
o Multiple orders of the same item
o Unusually large orders
o Multiple orders to the same address with different cards
o Unexpected international orders
- Require identity verification
Finding a balance between protection and ease of purchase will ultimately help you protect your customers and your business. The following tactics can make it more difficult for fraudsters to be successful:
o For customers that have a login, require a minimum of eight characters as well as the use of special characters in your customers’ passwords
o Set up Two-Factor Authentication that requires a One-time Passcode (OTP) via SMS or email
o Use biometric authentication for mobile purchases or logins
- Monitor chargebacks
Keeping good records is essential for eCommerce. If a customer initiates a dispute, your only available recourse is to provide proof that the order was fulfilled. Be prepared to provide all the supporting information about a disputed transaction. Worldpay’s Disputes solutions can connect to your CRM and provide you dual-layer protection against friendly fraud, first deflecting them before they arise and then fully managing chargeback defenses on your behalf.
- Monitor declines
Credit card issuers mitigate fraud by automatically declining payments that look suspicious, based on unusual card activity such as drastic changes in spending patterns or uncommon geolocations of spending. You can check your own declined payment history to help spot a potential problem. When volumes increase, the help of a payments fraud management partner is beneficial.
- Protect your own wallet
While you take the steps to protect your business, it’s also important to be mindful of your own protection—it’s incumbent on all responsible consumers to be vigilant about their data. Whether it’s simple awareness of how the fraudsters are operating today, sticking to trusted brands when shopping online, and thinking twice about what data you share and who you share it with, you’ll soon see how often you are sharing personal information about yourself.
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