By Marcin Nadolny, Head of Regional Fraud & Security Practice at SAS
The Europe-wide PSD2 implementation deadline will fall on 14 September. In the UK, it has now been confirmed that the official compliance deadline for the Secure Customer Authentication section of the regulation will be pushed out to March 2021. UK companies must be able to demonstrate that they are moving towards compliance from September 2019, but no enforcement action will be taken for 18 months. For the rest of the EU in general, the timeline is unchanged. However, national competent authorities have the flexibility to provide limited additional time to become PSD2 compliant (see the recent EBA opinion).
The big picture
But whichever country you’re in, it’s essential that companies recognise the urgency at play. In the new digital world, payment security is absolutely essential. The question now is not whether PSD2 compliance should remain at the top of the priority list. It’s how quickly companies can realistically achieve it. In a nutshell, PSD2 simultaneously massively increases the amount of financial data moving into banks’ systems while also making it mandatory that they run fraud controls on that data in real time.
As PSD2 ushers in the age of open APIs in finance, the traffic volume that payment processors will have to handle will be enormous. Consumers’ personally identifiable data will be at heightened risk, and we will observe increased malware attacks and data breaches via the newly created attack vectors. If businesses aren’t prepared for the change, it’ll be a fraudster’s paradise.
Is your organisation ready to cope with this new heavy traffic and identify fraudulent activities? It might be like finding a needle in a haystack. Fortunately, AI is coming to the rescue. Emerging technologies, such as predictive models, network analytics and anomaly detection, all have the power to increase your efficiency in finding and fighting fraud.
Real-time fraud detection
PSD2 is more than just a regulation. It’s the start of a major transformation for the payments industry. With the move to digital-first, open models, there’s an increased need to operate processes in real time – providing instant payments, for example – and that means that fraud prevention will need to move at the same speed.
Adequate anti-fraud protection is required by the regulation. Banks are expected to fill out certain tests as a fraud assessment, including reviewing behavioural profiles, checking known compromised devices and IDs, applying known fraud scenarios to transactions, and detecting malware signs. Analytics can help speed up detection, find suspicious behaviours and collate data points by ingesting new data sources. This builds a picture of “normal” behaviour against which banks can measure transactions.
At present, not all banks are applying all these anti-fraud measures. Some base their protection on simple rules and aren’t able to detect fraud in real time or stop transactions in progress. These abilities aren’t technically required by the regulator until PSD2 comes into effect. Real-time fraud prevention used to be a luxury – but now it’s a must-have. Banks must take the initiative to ensure they can detect fraud in process in incredibly short time frames.
Third parties enter the market
The other major change included in PSD2 is the arrival of third-party providers in the market. These nonfinancial companies, including GAFA (Google, Amazon, Facebook and Apple), e-tailers and fintechs, will be able to work as payment processors going between customers and banks. This means the banks have a much bigger traffic volume to handle and review for fraud. Legacy systems and processes simply can’t handle it.
In order to cope, banks need to have systems in place that are able to assess for fraud at huge volumes and in real time. Not only that, but transactions from third parties might come with limited contextual information. So banks will have to enrich them with additional data on variables including digital identity, reputation and past behaviour.
AI applications will be essential to handle that ongoing enrichment at speed. Humans alone simply can’t process that level of information. So it’s essential that banks invest in AI to augment the skills they have and lighten the load of compliance.
Managing the risk
The risk to banks posed by these growing data streams is not just in terms of payment fraud. There is also a heightened cybersecurity risk. New data flows and new payment systems present possible system back doors and new attack vectors that hackers will be quick to discover. By attacking third party infrastructure, malicious actors will be able to gain access to consumers’ personal data.
Addressing this problem is not the sole responsibility of the banks. But it highlights the level of risk associated with the increase in data volume and connectedness. Reputational damage and heavy fines are a very real possibility for institutions that don’t get their act together in time.
Compliance will require many changes to anti-fraud and customer identification processes. The technology required to handle this additional burden is out there. Banks must invest wisely and ensure they are fully equipped, whether next month or by 2021.
SAS will be attending the 2019 SIBOS conference in London, where PSD2 will be a key item on the agenda. Visit our stand to find out more about how AI could help you get ready for the deadline.
- Financial performance impacted by the pandemic
- Expected credit loss (ECL) charges of £45.8 million recognised on loans and advances to customers
- Profit before tax (PBT) was impacted by the adverse effects of COVID-19 and the subsequent provisions set aside, reducing by 89% to £5.9 million
- Customer deposits rose by 25% to £7.6 billion while capital remained strong with a CET1 ratio of 12.3%
- A total of 15.9k payment holidays granted across the Group
- The specialist bank continued to operate effectively through COVID-19
- 98% of employees moved to remote working within days and no staff furloughed
- Successfully achieved accreditation under UK Government’s CBILS
- Continued investment in technology to digitalise the business
- Shawbrook “cautiously optimistic” as momentum begins to return to certain specialist sectors
Shawbrook Bank has today (Monday 10 August 2020) published its half year financial results for the period ending 30 June 2020.
The specialist bank confirmed it had set aside £45.8 million of provisions to provide for potential future loan impairments caused by COVID-19. The bank reported it had also granted a total of 15.9k payment holidays to support its customers through the pandemic, of which 10.8k remained in force at 30 July 2020.
As a result of such provisions, the bank’s profitability was impacted with a reduction in PBT by 89% to £5.9 million.
Despite the challenging market conditions, the bank retained its active position in the UK savings market, increasing its retail savings deposit base by 25% to £7.6 billion. During the period, Shawbrook also successfully completed a £75 million Tier 2 re-financing to further optimise its capital structure.
Ian Cowie, Shawbrook Bank’s Chief Executive Officer, said that COVID-19 has had a clear impact on the bank’s financial performance, but Shawbrook remained in a position of strength.
He commented: “Prior to COVID-19, the Group had continued to make good financial progress, starting 2020 with a strong balance sheet and prudently positioned capital and liquidity base.
“To further optimise the Group’s capital structure, during H1 2020 we initiated a Tier 2 refinancing and, despite the challenging market conditions, successfully completed the £75 million issuance in July.
“We have also maintained our active position in the UK savings market. However, the longer-term economic impacts of the pandemic remain hard to predict and as a result we have recognised expected credit loss charges in the period on loans and advances to customers of £45.8 million and on loan commitments of £1.5 million.
“While this has clearly had an impact on profitability, our capital strength positions us well to support our customers and grow our business in line with appetite as we enter the second half of the year.”
Throughout COVID-19, Shawbrook maintained full operational functionality, with no staff furloughed and 98% of employees transferred to remote working within days of the UK lockdown being announced.
The bank adopted a series of concession opportunities across its product range to help alleviate the financial impacts of COVID-19 on its customers. During this time, Shawbrook also successfully achieved accreditation to the UK Government’s Coronavirus Business Interruption Loan Scheme (CBILS) to provide further funding support to its SME clients.
Mr Cowie added: “Since the outbreak of COVID-19, our focus has remained on supporting our staff, customers and partners while at the same time safeguarding the long-term sustainability of our business.
“When the UK lockdown was announced in March 2020, we acted with speed and agility, moving to an almost entirely remote operation within days. Led by a stable and experienced management team and with the support of new and existing technology, we have continued to operate effectively throughout this period.”
Throughout the first half of the year, the bank also continued to identify investment opportunities to further digitalise its proposition, with a core focus on its SME offering.
Mr. Cowie added: “Notwithstanding the pandemic, we have continued to invest in our business to help drive our strategic ambition to become the UK’s Specialist SME Lender of Choice. As well as the ongoing deployment of targeted digital solutions across the Property, Consumer lending and Savings businesses, our investment in the development of a new growth platform in our Business Finance franchise will serve to further modernise our offering, delivering an enhanced customer journey as well as significant operational efficiencies.”
Looking to the future he continued: “Although significant uncertainties regarding the broader macroeconomic impact and pace of recovery remain, we are cautiously optimistic in our outlook as we start to see signs of momentum returning to certain of our specialist sectors.
“Our management expertise and prudent approach to credit decisioning, combined with investment in our digital propositions, means we are well positioned to adapt and respond to opportunities as they arise throughout the second half of the year.”
Better banking—everyday in everyway
By Bruno Pešec president at Pesec Global.
Some of the most innovative companies are also great at continuous and incremental improvement. I want to talk about three key points when it comes to succeeding with implementation of continuous improvement.
First is acknowledging that employee empowerment is at the heart of continuous improvement. The second is striving for total involvement by everybody, everywhere, everyday. Final, third point is that improvement is improvement. Cents turn into dollars.
Let’s expand on each.
Employee empowerment is at the heart of continuous improvement
In “Kaizen: The Key To Japan’s Competitive Success” Masaaki Imai divulges following as the core principles of continuous improvement:
- Process orientation. “Before results can be improved, processes must be improved, as opposed to result-orientation where outcomes are all that counts.”
- Improving and maintaining standards. “Lasting improvements can only be achieved if innovations are combined with an ongoing effort to maintain and improve standard performance levels.”
- People orientation. “Improvement is people-oriented and should involve everyone in the organization from top management to workers at the shop floor. Further more, it is based on a belief in people’s inherent desire for quality and worth, and management has to believe that it is going to “pay” in the long run.”
These principles are interlinked and interdependent. Without empowered people there can be no improvement. Micromanaging and overbearing bureaucracy stifle human creativity and desire to do better.
Due to the nature of my work I have residence in two countries, Croatia and Norway. Consequently, I have bank accounts in both as well. On one occasion I was had to make a bank transfer while in Croatia, and went to my local bank office to do so.
To my surprise they requested my debit card. I explained that I’ve forgotten it, but surely that shouldn’t be a problem as I’m here in person, have my national ID as well as passport, and cash required for transfer. The bank teller explained that he can ask branch manager to approve it, but it takes seven days.
Since the manager was right there, I asked why can’t we do it right now, since we are all here. “Sorry, such are the policy and procedures. I know it doesn’t make sense, but we must follow them.”
Banking is a highly regulated industry; fraud detection and anti-money laundering processes must be impeccable; but above is neither.
Everybody, everywhere, everyday
Bottom up is usually brought up when discussing implementations of continuous improvement. While it is true that those closest to work are most suitable to improve it, they often lack decision making power and budget to do so on a scale.
That’s why “everybody, everywhere, everyday” is a better mental model. No one is absolved of improvements. At any given moment there are at least hundred things you can improve right now, right here.
Think deeply about following:
- Everybody in the organisation should be aware and have an understanding of organization’s strategy and objectives. There’s shouldn’t be multiple interpretations, and it should be unambiguous. Without clarity improvement efforts are going to be scattered and without impact.
- No elitism, no absolution. Everybody should be actively committed to daily improvement, regardless of their rank or seniority. Leaders should be especially cognizant of leading by example. After all, how can they demand from others what they themselves are not doing. That’s hypocrisy at its finest.
- To improve is to learn, and to learn is to improve. Unlock even more value from your continuous improvement efforts by capturing the learning and sharing it broadly and deeply within the organisation. Ideas spawn ideas, perpetuating a virtuous cycle. Peer learning is also a powerful intrinsic driver.
Improvement is improvement
Director of one European bank invited me to their customer service centre, and we were to discuss how could they innovate better. After the meeting I asked him to take me on the walk around the office so I can observe the processes. He was more than happy to oblige.
The walls were plastered with wallpapers and dashboard, colourful metrics were displayed one the hanging screens, and there was a special area dedicated to the “Hall of fame.” Much to my delight there was a wall dedicated to the improvement ideas.
It was covered with large sticky notes, each with few sentences about the problem and potential solution. I picked a few at random, and noticed that they have dates written in bottom left corner. All of the dates were months ago.
Perplexed, I asked the nearby call operator to illuminate me. What’s going on? She fired her response like she was just waiting for someone to ask her that question:
“After each call we used to write down some improvement ideas. At the end of the week we collated and submitted them to the improvement department. They were constantly rejecting our proposals for either being too small or not innovative enough. After few weeks we stopped sharing and tried to implement what we can. That resulted in one of us being scolded for taking initiative without approval, so we just stopped altogether.”
Director was blushing, but hasn’t said anything. I thanked the operator for her honesty, and told the director that he should find time to fix this. By ignoring small, incremental improvements, they are effectively atrophying their organisational muscles. And not to mention all the savings that are left behind, lost forever. Cents turn into dollars.
I’ve talked about three key points in regards to the role of employee empowerment in the implementation of continuous improvement, and what you can do to use them well. Let me remind you that if you really want to engage in this, the first thing to do is take any of them and start today.
UBX appoints new Chief Investment Officer
In line with its strategy to explore and invest in companies and platforms of the future, UBX—the Fintech and Corporate Venture Capital arm of Union Bank of the Philippines (UnionBank) — is announcing the appointment of Matthew Kolling as the company’s Chief Investment Officer (CIO).
As CIO, Kolling will be managing UBX’s Corporate Venture Capital (CVC) fund. He will also play a key role in raising capital for UBX while assisting the company in key corporate transactions, including the structuring of joint ventures and acquisitions.
Prior to his appointment at UBX, Kolling has been Head of Venture Investments at Aboitiz & Company since 2019, wherein he had been working with UBX on investment portfolio decisions. Before that, he held senior positions in Private Equity, Venture Capital, and Investment Banking at firms such as Providence Equity Partners and Morgan Stanley in New York.
Kolling has more than 20 years of experience in managing investments and deals in the Technology and Telecommunications industries and is active in Venture Capital and startup communities in the Philippines and the Southeast Asian region. He currently chairs the Manila Angel Investors Network, among others.
“We at UBX are excited to welcome Matt as our new CIO. We firmly believe that Matt will be instrumental in driving value creation opportunities, both within the CVC fund and our corporate ventures. We look forward to working with him as we fulfill UBX’s vision of a future where banking services are embedded into everyday experiences that matter,” said UBX president and CEO John Januszczak.
Meanwhile, UnionBank president and CEO Edwin Bautista said, “The addition of world-class talents in our pool reinforces our strategy to future-proof the organization and our business as we prepare for many new opportunities that come with the changing times.”
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