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Managing Big Data and Big Risks in Banking

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Managing Big Data and Big Risks in Banking 1

By Eric Crabtree, Global Head Financial Services, Unisys

Eric Crabtree, Global Head Financial Services, Unisys

Eric Crabtree, Global Head Financial Services, Unisys

Data is playing an increasingly important role within the banking industry. It is key to driving the development of intelligent omnichannel customer interactions, tailored to suit the needs of individuals and households. Data is also powering new technologies, such as AI and bots, which are in turn helping to improve operational efficiency and reduce risks. Data is even enabling new banking models, such as peer-to-peer lending, crowdfunding and the sharing economy.

The impact of data is best highlighted by looking at the advances in consumer credit. Traditionally, banks primarily rely on credit scores, which are based on a narrow range of slow-moving data points. This modeling approach brings about two major constraints. First of all, decision-making is slow due to banks having an incomplete view of a consumer’s financial health. And second, this creates ‘thin files,’ especially on millennial consumers who lack a financial history and have an aversion to debt. In fact, in many countries, the use of consumer credit has been solely negative, whereby banks use the model to essentially blacklist people who have made late payments.

Today, banks are basing their lending and risk management decisions on integrated data. Debt repayment information is being combined with near real-time transactional and account balance data to build thorough risk assessment models. Instead of relying on the timeliness of payments or the percentage of available credit used, they can assess risk patterns from past behavior to sense future changes.

With ‘thin file’ consumers, banks and credit reporting agencies are leveraging new data sources, such as bill payment history and mobile phone usage. In some cases, particularly with non-bank lenders, the nature of a consumer’s social media network can also contribute to assessing credit worthiness.

Data can be used to tailor sales and marketing interactions. In the same way that it helps banks form a detailed view of a consumer’s credit worthiness, it can also be used to customize sales messages and products for the benefit of increasingly service-savvy customers.

Acting on Data

Often, the volume, velocity and range of data types can technically exceed the capabilities of traditional technologies (e.g., relational databases). Unstructured data, such as video, voice and text, are particularly unsuited to former IT approaches and first generation Big Data technologies.

To combat this, banks are adopting machine learning, where predictive models continually train themselves based on streams of data. Machine learning can help identify nuanced details for improved results. For instance, traditional regression or decision tree approaches may predict which customers are likely to churn based on relevant variables. Machine learning goes beyond linear relationships to recognize interactions across much broader sets of data.

Success will rely on cultural change. In light of fast-moving data and the increased pace of change in expectations, a much more iterative approach to planning is required. In particular, the move to agile product development requires a significant shift in product management style.

The Challenge to Banking

Inevitably, the central role of data brings about new risks. People need to understand how to govern and organize for an analytically-driven business. For example, many banks currently only keep data on people who successfully apply for credit. By definition, including only this subset, rather than all who applied, means banks are at risk of reducing their marketing opportunities with new prospects.

However, the most acute risks may be external. Cyber threats are damaging more than just reputation these days and are actually leading to the removal of CEOs, as is the case with Target and Sony. Similarly, senior government and academic leaders are also losing their jobs in response to data breaches. The nature of threats has changed as well, with hackers now seeking physical effects or attempting to discredit an organization by subtly corrupting, rather than stealing its data.

Solving for the Future

In order to remain competitive, banks need to ensure they have the best security technology at their disposal.

This includes authentication, such as the use of biometric technology that can confirm a consumer’s identity. This is centered on an understanding of usage habits, for example, a person’s unique way of holding a phone, their typing speed and the angles at which they swipe their finger.

Separately, machine learning can be applied to detect threats. For example, a cyber analytics model can continually ingest large streams of network activity data to define activity baselines and detect anomalies. These models can be applied within an organization’s cyber security software, as well as integrated with threat intelligence.

This ability to protect customers is based on continuous innovation. And the ability to understand and anticipate the evolving nature of cyber threats worldwide is critical for banks to ensure future success. With the proper technology, banks can ensure that their tomorrow is secured.

Banking

Citigroup considering divestiture of some foreign consumer units – Bloomberg Law

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Citigroup considering divestiture of some foreign consumer units - Bloomberg Law 2

(Reuters) – Citigroup Inc is considering divesting some international consumer units, Bloomberg Law reported on Friday, citing people familiar with the matter.

The discussions are around divesting units across retail banking in the Asia-Pacific region, the report https://bit.ly/3pD57WP said.

“As our incoming CEO Jane Fraser said in January, we are undertaking a dispassionate and thorough review of our strategy,” a Citigroup spokesperson told Reuters.

“Many different options are being considered and we will take the right amount of time before making any decisions.”

The move, part of Fraser’s attempt to simplify the bank, can see units in South Korea, Thailand, the Philippines and Australia being divested, the Bloomberg report said.

However, no decision has been made, according to the report.

Revenue from Citi’s consumer banking business in Asia declined 15% to $1.55 billion in the fourth quarter of 2020.

The divestitures could be spaced out over time or the bank could end up keeping all of its existing units, the Bloomberg report said.

The firm is also reviewing consumer operations in Mexico, though a sale there is less likely, the report said, citing one of the people.

Last month, New York-based Citigroup beat profit estimates but issued a gloomy forecast for expenses. Finance head Mark Mason said the lender’s expenses could rise in 2021 in the range of 2% to 3%, weighing on its operating margins. (https://reut.rs/2ZwXRB1)

(Reporting by Niket Nishant in Bengaluru; Editing by Maju Samuel)

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European shares end higher on strong earnings, positive data

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European shares end higher on strong earnings, positive data 3

By Sagarika Jaisinghani and Ambar Warrick

(Reuters) – Euro zone shares rose on Friday, marking a third week of gains, as data showed factory activity in February jumped to a three-year high, while upbeat quarterly earnings boosted confidence in a broader economic recovery.

The euro zone index was up 0.9%, with strong earnings from companies such as Acciona and Hermes brewing some optimism over an eventual economic recovery.

The pan-European STOXX 600 index rose 0.5%, as regional factory activity was seen reaching a three-year high on strong demand for manufactured goods at home and overseas.

Another reading showed the euro zone’s current account surplus widened in December on a rise in trade surplus and a narrower deficit in secondary income.

Still, the STOXX 600 marked small gains for the week, having dropped for the past three sessions as investor concern grew over rising inflation and a rocky COVID-19 vaccine rollout.

But basic resources stocks outpaced their peers this week with a 7% jump, as improving industrial activity across the globe drove up commodity prices.

“This week’s slightly adverse price action has all the hallmarks of a loss of momentum temporarily and not a structural turn,” said Jeffrey Halley, senior market analyst at OANDA.

“There is not a major central bank in the world thinking about taking their foot off the monetary spigot, except perhaps China. (Markets) will remain awash in zero percent central bank money through all of 2021 (and) a lot of that will head to the equity market.”

Minutes of the European Central Bank’s January meeting, released on Thursday, showed policymakers expressed fresh concerns over the euro’s strength but appeared relaxed over the recent rise in government bond yields.

The bank’s relaxed stance was justified by the euro zone economy requiring continued monetary and fiscal support, as evidenced by a contraction in the bloc’s dominant services industry in February.

The STOXX 600 has rebounded more than 50% since crashing to multi-year lows in March 2020, with hopes of a global economic rebound this year sparking demand for sectors such as energy, mining, banks and industrial goods.

London’s FTSE 100 lagged regional bourses on Friday due to a slump in January retail sales and as the pound jumped to its highest against the dollar in nearly three years. [.L] [GBP/]

French carmaker Renault tumbled more than 4% after posting a record annual loss of 8 billion euros ($9.68 billion), while food group Danone and German insurer Allianz rose following upbeat trading forecasts.

(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)

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Banking

ECB plans closer scrutiny of bank boards

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ECB plans closer scrutiny of bank boards 4

FRANKFURT (Reuters) – The European Central Bank plans to increase scrutiny of bank board directors and will take look more closely at diversity within management bodies, ECB supervisor Edouard Fernandez-Bollo said on Friday.

The ECB already examines the suitability of board candidates in a so-called fit and proper assessment, but rules across the 19 euro zone members vary, so the quality of these checks can be inconsistent.

The ECB plans to ask banks to undertake a suitability assessment before making appointments, and they will put greater emphasis on the candidates’ previous positions and the bank’s specific needs, Fernandez-Bollo said in a speech.

The supervisor also plans more detailed rules on how it will reassess board members once new information emerges, particularly in case of breaches related to anti-money laundering and financing of terrorism, Fernandez-Bollo added.

Fernandez-Bollo did not talk about enforcing diversity quotas, but he argued that diversity, including diversity in gender, backgrounds and experiences, improves efficiency and was thus crucial.

“Supervisors will consider furthermore all of the diversity-related aspects that are most relevant to enhancing the individual and collective leadership of boards,” he said.

“Diversity within a management body is therefore crucial … there is a lot of room for improvement in this area in European banks,” he said.

(Reporting by Balazs Koranyi, editing by Larry King)

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