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The challenges of the European financial sector

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José Manuel González-Páramo, Member of the Executive Board of the ECB,
Conference at the Spanish National Council of the Urban Land Institute (ULI)
Barcelona

It is a privilege for me to participate in this conference organised by the Spanish Council of the Urban Land Institute, dedicated to the very important topic of the challenges currently faced by the European banking sector. Many of these challenges are associated with the ongoing restructuring process of the banking sector and the completion and implementation of the new European and international regulatory and supervisory framework.
The protracted financial crisis that we have experienced since 2007 has unveiled important sources of vulnerability in the financial system. These include weaknesses of the regulatory and supervisory framework of the banking sector, which failed to ensure the safety and soundness of financial institutions both individually and as a system. This has prompted the relevant authorities to pursue a number of reforms of the microprudential supervisory and regulatory framework, while also assigning central banks all over the world macroprudential tasks in recognition of the importance of the systemic component of financial stability.
In addition, the crisis has shown that the relationship between financial development and economic growth is not really linear and that, when financial sectors become “too large” relative to their home economies, risks to financial stability and macroeconomic stability may arise. Moreover, the crisis has undermined the sustainability of some business models that were rather widespread among large international banks, while also exposing the shortcomings of corporate governance and of the evaluation and management of the different sources of risk within financial institutions.
Given the location of this conference, I should recall that one of the factors that make the current crisis so challenging and costly is the interaction among its various housing-related components (housing prices, housing finance and the construction sector). Indeed, we know that a housing market bust was typically a feature of the costliest systemic crises experienced over the past century, including the Nordic banking crisis of the early 1990s and the Japanese financial crisis started in the 1990s. In my intervention, I will try to highlight the aspects of the current policy and regulatory debate that are most relevant for the housing sector.
II. Towards a new economic and financial paradigm: The “new normal”
The crisis has affected the macroeconomic and financial environment in which banks operate. In the aftermath of the crisis, it is very likely that many fundamental elements of our economies and financial systems will work differently in a number of aspects, reflecting processes of adjustment in the behaviour of agents and policy-related reforms that are currently under way. More generally, empirical evidence shows that systemic banking crises typically affect the structure and dynamics of economic systems over very protracted periods. [1]
Before venturing into the future, let me recall the main elements of the pre-crisis economic and financial paradigm, i.e. the “old normal”.
•    Reduced macroeconomic volatility. Prior to the deterioration of the crisis in October 2008, our economies experienced two decades of significantly reduced macroeconomic volatility. A number of empirical studies documented a significant decline in the variability of both economic growth and inflation in almost all major industrialised economies. Most of the debate among monetary economists focused at the time on the predominant source of “the Great Moderation” among three main candidates: (1) better macroeconomic policies, (2) structural changes in the economies, and (3) less disruptive distributions of shocks (“good luck”). While the alternative explanations could in theory have different implications for the sustainability of the decline in macroeconomic volatility, in general few doubts were expressed about the steadiness of this new state of the world: the “Great Moderation” was here to stay.
•    Sustained economic growth. The decline in macroeconomic volatility was also accompanied by a significant improvement in economic performance as agents were able to extract the dividends of sustained price stability and reduced uncertainty about macroeconomic activity. Potential growth in most developed economies rose, enabling their citizens to benefit from protracted periods of economic expansion, only infrequently interrupted by relatively moderate recessions.
•    Strong dynamics of house prices. Sustained economic growth, supported by low and stable interest rates, contributed to improving expectations about asset prices, particularly about house prices. Optimistic expectations about housing markets at a time of: (a) increasing deregulation and liberalisation of the banking and financial sectors, (b) fast financial innovation, and (c) progressive globalisation of financial markets, led to rapid appreciation of house prices, which was supported by excessive indebtedness of households in some countries. The rise in household indebtedness and house price inflation was particularly significant in those countries in which the decline in nominal interest rates as a result of the shift to price stability had been more pronounced and in those that received large immigration flows.
•    Increased profitability of the financial sector at a time of historically low risk premia. In the years preceding the crisis, the profitability of banks and other financial institutions significantly improved as a result of generally favourable economic and financial conditions. At the same time, it was pointed out that the improvement in profitability had taken place against a background of: (1) unusually subdued volatility in financial markets, (2) credit risk premia at historically low levels, (3) very high valuations of asset prices, and (4) relatively light regulation and supervision in some countries. Moreover, the improvement in the financial positions of banks had taken place in an environment characterised by ample market liquidity across a number of global financial markets, which led to almost no liquidity risk premia being priced in.
As the crisis is still unfolding, we cannot tell with certainly how our economic and financial systems will function in the future. However, we can safely predict that many of the elements of the old paradigm will no longer be valid. This will give rise to an economic and financial “new normal” in the post-crisis period. Some of the its main elements, that can be sketched out based on previous experiences of systemic banking crises, are as follows:
•    Somewhat higher macroeconomic volatility and lower potential growth
•    Protracted periods of adjustment in housing markets and in the construction sector
•    More rigorous scrutiny of valuation of property as collateral for credit, also using making use of independent valuation sources
•    An upward shift in the pricing of credit and liquidity risk
•    Stricter regulation in order to strengthen the resilience of the financial sector, though probably at the cost of making financial intermediation somewhat more expensive
•    Evolving role of central banks (stronger inclination towards “leaning against the wind” policies and the assignment of macroprudential objectives)
Changes in the macroeconomic environment, regulatory and supervisory framework as well as industry structure may have very significant implications in the way the financial sector operates in the future. Let me briefly elaborate on some of those implications.
III. The banking sector after the crisis
An important consequence of the financial crisis is the significant transformation which is taking place in the EU banking sector. The global overhaul of banking regulation and supervision resulting from the crisis, the demanding macroeconomic environment and the ongoing deleveraging and banking restructuring in some European countries are key factors which are shaping the future of the banking industry both in the short- and medium-term.
In the context of the lessons learnt from the crisis and of the regulatory reform, the rest of my speech will focus on the main aspects of this reform and the developments in the size of banking sectors, banking business models and corporate governance. I will conclude by discussing the role of central banks in the new macro-prudential supervisory framework.
III.1 Regulatory and supervisory micro-prudential framework
The crisis has revealed serious gaps in the regulatory and supervisory framework for financial institutions, both with regard to the prudential rules on capital and those on liquidity. Several systemically important institutions that seemed to have a solid financial position before the crisis proved not to be sufficiently resilient to withstand the shocks that have hit the financial system in the past three years and a half. Consequently, governments and central banks had to provide an unprecedented amount of support, and in parallel with this process, several initiatives have also been launched that resulted in a major overhaul of the regulatory and supervisory framework.
A core element of the regulatory reform was the complete revision of the Basel II framework (now commonly referred to as Basel III) that has been recently agreed by the members of the Basel Committee and endorsed by the Group of Central Bank Governors and Heads of Supervision. The key elements of the new framework include:
(i) a new definition of regulatory capital that will improve both the quality and consistency of the capital base,
(ii) the introduction of capital conservation buffer requirements that would constitute an additional layer of protection for banks, especially in periods of excessive credit growth,
(iii) the strengthening of the risk coverage of the capital framework that would represent a revision of the prudential rules on securitisation and trading book activities as well as the counterparty credit risk framework,
(iv) the planned introduction of a non-risk based leverage ratio that would serve as a supplementary measure to the risk-based requirements to contain the build-up of excessive leverage and address model risks associated with the risk-based capital framework, and
(v) the development of a liquidity risk framework that would aim at improving the resilience to liquidity shocks of the banks.
The new measures will be introduced over a transition period of 8 years, and have been calibrated with the aim of avoiding severe implications for the national banking system, while supporting economic recovery [2].
III.2 “Too large” and non-transparent financial sectors?
Turning to the developments in the banking sector, let me recall that the size of the financial systems dramatically increased during the past few decades both in Europe and in the US. [3] To judge whether the financial sector has grown “too large”, it is crucial to answer the question of whether or not the expansion of finance before the crisis was driven by fundamentals.
On the one hand, it is clear that this process was fuelled by fast economic growth and a rapid accumulation of savings in emerging markets. On the other hand, developed countries engaged in rapid innovation in the field of financial products, which allowed the more efficient channelling of domestic and global savings towards productive investments. The most striking developments in this respect occurred with credit default swaps (CDSs) and securitised products. This increase in financial innovation may, in turn, have led to an inefficient allocation of resources, excessive risk-taking and over-leveraging of the system. Examples of such resource misallocation include the expansion of the US subprime mortgage market and of the shadow banking system.
Similarly, while we have always known that financial innovation can contribute to enhancing risk diversification, it is clear that innovative financial instruments also have the potential to undermine financial stability. For example, the complexity of new instruments might lead to a misallocation of capital and risk among market participants. In this respect, the crisis has exposed the fragilities of the securitisation process, including the misalignment of incentives among agents participating in the origination and in the distribution, lack of transparency with regard to the risks underlying securitised products and the inadequate management of the risks associated with the securitisation business. It is by now evident to everybody that weaknesses in the business model based on “originate-to-distribute” contributed to the worsening of loan quality. [4]
The experience of the crisis also suggests that most investors hugely underestimated the risks of the most complex financial instruments. This is precisely why there is an increasing demand for transparency about both the degree of risk of individual instruments and the exposures of institutions to different instruments, markets and counterparties. The EU-wide stress test exercise proved to be an important step toward a more transparent assessment of the exposures of individual institutions to different instruments and countries. The forthcoming EU-wide stress test will be more comprehensive and detailed than the previous exercise, thereby playing an even more important role in supporting banks’ access to medium- and long-term funding.
Going back to the ongoing regulatory reforms, while the overall impact in terms of the size of the banking sector is expected to be moderate on average, some business lines or institutions may be relatively more severely affected. Overall, credit institutions that are smaller and focused on the traditional retail banking business are not expected to be severely affected by the new prudential rules. However, some large universal banks (especially those with significant investments in other financial institutions and in insurance companies, often across borders) will face new challenges, mainly resulting from the new definition of capital and from the introduction of the leverage ratio.
These large institutions are typically more leveraged than their smaller counterparts and, as a result of the introduction of certain adjustments in the calculation of the regulatory capital, their capital bases may need in some cases to be strengthened further in order to include only high quality resources with true loss absorbing capacity. Given that the structure of the financial system is rather heterogeneous across EU countries, the national banking sectors will have to face different challenges in the years ahead.
It is important to emphasise in this context that several policy initiatives have been launched recently to address the specific risks associated with systemically important financial institutions (SIFIs). In particular, the Group of Governors and Heads of Supervision agreed in September 2010 that SIFIs should comply with additional capital requirements over and above the Basel III minimum requirements.
Extensive work is currently being carried out under the aegis of the Financial Stability Board to develop a framework for the identification of the SIFIs and the calculation of the additional capital requirements. Its recommendations will be delivered to the G20 summit in November. This is an important step forwards towards an international regulatory framework of SIFIs that ensures consistency and a level playing field across jurisdictions.
In addition, important initiatives are underway – both in Europe and globally – to enhance the banks resolution regimes so as to be able to handle systemic crises in an effective and orderly way, while also minimising the burden for taxpayers. In particular, such regimes must consider the case of institutions that are active across borders.
The FSB is identifying the key elements of effective resolution regimes. At the same time, the reform of national (or in the case of the EU, supra-national) resolution frameworks is already underway in the main economies. In Europe, the European Commission has published a public consultation document on the planned EU framework, for which legislative proposals are expected in June.
Furthermore, work on how to strengthen the regulation and oversight of the shadow banking system must continue. The FSB is developing recommendations on this issue in collaboration with other international standard-setting bodies. It is also vital to identify entities or activities within the shadow banking system that may be sources of systemic risk.
At the same time, in the short- to medium-term it will be inevitable to improve the cost efficiency of banks as well as to make changes in the ownership structure and in the business activities of certain institutional models, while also restructuring some segments of the national banking sectors. To live under the “new normal”, banks must first get there. This may require consolidation as well as changes in corporate governance, transparency and business models.
III.3. Business strategies and corporate governance
Business models
The crisis has shown the vulnerabilities of some business models. In particular, it has exposed the fragilities of those models based, on the one hand, on “originate-to-distribute” activities and securitisation techniques, and, on the other hand, on excessive dependence on wholesale and capital markets for funding. Although no business model outperformed the others during the crisis, there is evidence that banking models based on higher diversification of activities and funding proved to be the most resilient. This explains why such models are becoming increasingly attractive within the European banking landscape.
Indeed, diversified business models act as better shock absorbers in times of stress, and their ability to perform well under stressed conditions represents an additional incentive to adopting them. In the aftermath of the financial crisis, rating agencies, investors and counterparties have significantly reduced their tolerance to leverage and now discriminate more between firms with different risk profiles.
In this regard, the main priority of EU banks in terms of their business strategies in the post-crisis period is currently to focus on their balance sheet structure (e.g. the composition of lending and of their funding sources), with a view to making it more robust and transparent.
Furthermore, some banks still remain too dependent on central bank facilities for their funding, which is not sustainable in the long run. This requires efforts to adjust business strategies towards more sustainable models. There is some evidence that point to an increasing recourse to retail deposits among large EU banks. After experiencing a reduction during the years prior to the crisis, retail deposits started on an upward trend in late 2008, and such trend has continued into 2009 and 2010. A remaining challenge is though the fact that at present banks are often competing for the same deposits, which makes it difficult to achieve substantial increases in their deposit bases and may also erode their margins.
At the same time banks have reviewed the geographical location of their assets. The increasing internationalisation of important European groups reveals the preference among large EU banks for regional diversification.
Reforms of the regulatory framework that aim to render bank business models more resilient are a key factor that will contribute to moving funding structures away from volatile short-term sources towards more stable long-term ones, such as capital and deposits. As a consequence of the substantial strengthening of the regulatory requirements on trading book exposures and on securitisation, the relative attractiveness of traditional investment banking activities is expected to decline. Similarly, with the envisaged introduction of the non-risk based leverage ratio, certain institutions specialised in business lines that are traditionally considered as relatively low-risk (e.g. mortgage lending) may need to reconsider their activities and look for alternative sources of revenue.
Risk management
Apart from the regulatory initiatives, the banks’ internal risk management represents a first line of defence against increasing risks. The need for improved risk measurement and management practices with regard to the main risks institutions are exposed to (e.g. credit, liquidity and market risks) has also been recognised in a number of industry studies that have identified areas in need of improvement [5].
Supervisory authorities have issued guidelines on required improvements in corporate governance and risk management (in areas such as liquidity and stress testing) and have also issued supplemental guidance under Pillar 2 (the supervisory review process) of Basel II that addresses the flaws in risk management practices revealed by the crisis. Although progress has been made in improving internal risk management systems, considerable work must yet be done. [6]
Looking forward, the re-shaped banking strategies need to reflect a better balance between risk and returns. An important challenge for the EU banking sectors in the next few years will be to find the optimal level of return that preserves long-run profitability, without incurring in unknown risks.
There are also several initiatives aiming to improve corporate governance in key segments of the financial industry. Let me recall in particular the European Commission’s proposal of a directive on credit agreements relating to residential property. The objective of the proposal is twofold: (1) to create an efficient and competitive single market for consumers, creditors and credit intermediaries, and (2) to promote financial stability by ensuring that mortgage credit markets operate in a responsible manner. In addition, the FSB has issued a report entitled “Thematic Review on Mortgage Underwriting and Origination Practices” aiming to improved oversight of the residential mortgage market and underwriting practices.
III.4 Central banks and the new macro-prudential supervisory framework
I would like now to provide a brief reference to the new macro-prudential supervisory framework in Europe.
The financial crisis has provided a vivid illustration of the importance of having in place an effective framework of macro-prudential surveillance that can complement micro-prudential supervision both at the national level and in a cross-border context. Thus, in order to enhance their abilities to assess and address potential systemic risks, over the past few years significant work has been undertaken by authorities at country, regional and global levels with the aim of setting up a macro-prudential policy framework. In this respect, a major achievement at the European level has been the establishment of the European Systemic Risk Board (ESRB), entrusted with the responsibility of macro-prudential oversight at the EU-level. The ECB plays a key role by providing the ESRB with a Secretariat, and thereby logistical, administrative and analytical support.
A key objective of the ESRB is to link systemic risk analysis with appropriate policy responses. The analytical work will focus on identifying, measuring and assessing the potential sources of systemic risks on the basis of broad and deep information, and on applying a wide range of analytical tools to process the relevant data. The work will entail the assessment of the potential impact of the risks identified and of the ability of the financial system to withstand the related shocks. On the basis of the outcome of its risk analysis and assessment, the ESRB may issue concrete and well targeted risk warnings or policy recommendations.
There is no doubt that the establishment of the ESRB introduces a new function at the EU level that will enhance the ability of European and national authorities to promote the stability of the EU financial system as a whole. At the same time, much work needs to be done to advance in the design and implementation of the macroprudential frameworks. Indeed, unlike for monetary policy, the framework for macroprudential policy is not yet well developed. In particular, most of the policy tools that are considered for macro-prudential purposes at this stage fall under other policy area domains, such as micro-prudential supervision (e.g. capital and liquidity requirements), monetary policy implementation (e.g. minimum reserve requirements) and fiscal policy (e.g. tax incentives on mortgage interest rate payments).
The first genuinely macro-prudential tool to have been introduced is the counter-cyclical capital buffer that will be gradually implemented as part of Basel III. This buffer will be activated in periods of excessive credit growth, such as the credit booms frequently originating from or associated with housing price bubbles.
Further prudential tools include the caps on loan-to-value ratios, loan-to-income ratios or debt servicing-to-income ratios, which are typically applied to mortgage loans. Unlike the capital or liquidity requirements, these measure act through the demand for loans, as opposed to their supply by the banking sector. Other measures may include additional capital requirements by supervisors for individual banks that are considered by authorities to be particularly exposed to certain types of risks (e.g. concentration risk in housing markets). Furthermore, intensified supervision, accompanied by specific stress tests may also contribute to more cautious lending policy by banks.
In addition, enhanced transparency and more efficient communication of risks to customers (including increased financial literacy) may also support a better-informed decision making in housing finance and a more cautious behaviour of clients in this field. The experience of many East European countries over the past decade of widespread borrowing by households in foreign currencies as remote as the yen for the financing of housing purchases clearly points to insufficient financial literacy.
Before concluding my speech, let me recall that macroprudential policy is not the only instrument available to central banks which is being considered in order to prevent and contain systemic risks. Increasing awareness that: (1) price stability, while being a necessary precondition, is not sufficient for financial stability, and that (2) in regimes of low and stable inflation with firmly anchored inflation expectations, ample liquidity conditions and unsustainable economic expansions seem to manifest themselves first in the build-up of financial imbalances rather than in immediate inflationary pressures has re-opened the debate about the opportunity of pursing a “leaning against the wind” approach to monetary policy.
Leaning against the wind can be defined as a strategy whereby a central bank would decide, for instance, to set a somewhat tighter monetary policy stance than would be the case under a similar macroeconomic outlook and more normal financial market conditions in the absence of concerns about the emergence of an asset price bubble.
This subject deserves a speech on its own, so you will excuse me if I do not elaborate further. I would like just to point out that at the ECB we believe that our monetary policy strategy – with its medium-term orientation for the definition of price stability and the explicit introduction of money- and credit-related considerations into the policy decisions – ensures that longer-term risks to price stability, which emanate from evolving financial imbalances, are not overlooked in the assessment of risks to medium-term price stability. At the same time, the empirical link between monetary developments and evolving imbalances in asset and credit markets implies that the money pillar can help to detect these imbalances at an early stage, providing for a timely and forward-looking response to any risks to financial and macroeconomic stability.
IV. Conclusions
Let me now conclude. The future of the banking sector in the post-crisis macroeconomic and financial environment is an issue of crucial importance for our economic welfare, given the fundamental role played by banks in most European countries. This is why it is important to stress that there is still much work to be done before we can exit from the crisis.
In an economic and financial context which is still fragile, the adjustment towards a “new normal” continues posing important challenges and needs. It is essential that we continue making progress in reforming both the microprudential and macroprudential regulatory and supervisory framework. At the same time, the banking sector must continue addressing with perseverance, rapidity and determination the vulnerabilities in strategies and business practices of individual institutions revealed by the crisis. This is the only way in which the banking sector will become part of the solution to the problems that still represent obstacles to economic growth and employment creation.

________________________________________
[1]Reinhart, C.M. and K.S. Rogoff (2008), “The aftermath of financial crises”, NBER WP 14656.
[2]The impact assessments carried out by the Basel Committee and the Financial Stability Board with relation to the transitory and long-term effects of the Basel reform package revealed that the costs of financial intermediation may temporarily rise during the implementation phase (e.g. in terms of increasing spreads, lower credit volumes and a more moderate GDP growth). However, in the long run, the net positive benefits are expected to dominate as a result of lower probability of crises to occur.
[3]In the euro area, the expansion of banks’ balance sheets has been around 400% between 1992 and 2007 (just before the crisis) whereas nominal GDP has increased only 130%. As a result, the ratio of banking sector total assets to GDP, a measure of the depth of bank intermediation, increased from 145% in 1992 to 331% in 2007. It should be also noted that the reported assets understate the growth of bank activity in that period, as a lot of it took place off-balance sheet.
[4]See, among others, G. Dell’Ariccia, D. Igan and L. Laevan, “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market”, IMF Working Paper, No 08/106, IMF, 2008; and A. Maddaloni and J.-L. Peydro, “Bank Risk-Taking, Securitization, Supervision, and Low Interest Rates: Evidence from Lending Standards”, ECB Working Paper No. 1248, October 2010.
[5]The industry has published reports highlighting the need for improved risk measurement and management, including the provision of information to and involvement of senior management with regard to the risk profile of the institution. See for example publications by the Institute of International Finance: Reform in the Financial Services Industry: Strengthening Practices for a More Stable System (Dec. 2009), Principles of conduct and best practice recommendations, Financial services industry response to the market turmoil of 2007-2008 (Jul. 2008), report by the Counterparty Risk Management Policy Group entitled Containing Systemic Risk: The Road to Reform (Aug. 2008).
[6]Conclusion reached in a recent report by the Senior Supervisors Group entitled, Observations on developments in risk appetite frameworks and IT infrastructure, December 23, 2010.
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Finance

The value of digital identity in payments

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The value of digital identity in payments 1

By Vince Graziani, CEO, IDEX Biometrics ASA

In ever more challenging times, the payments industry needs to maintain trust by finding a way to protect consumers from the constant threat of payment fraud and theft. Consumer’s wishing to limit physical contact during the current pandemic has led to the popularity of contactless payments which has accelerated in multiple territories.

In the US, one in five shoppers have made a contactless payment for the first time during the pandemic according to research published in August by the National Retail Federation and Forrester. The bad guys have unfortunately taken note. This has led to a real need for the industry to fight back with enhanced security.

At the 2019 Money2020 Europe conference, there was a universal call for a comprehensive form of digital identity (ID) to enable digital payments. A form of digital identity that would make cashless payment interactions – secure, intelligent, efficient and private. The feeling was unanimous: without functioning digital ID, the payments revolution will stall.

Unlocking the payment ecosystem

In an increasingly connected world, consumers find themselves needing to authenticate their identity daily. Whether that be with financial institutions, retailers, government departments or healthcare providers. Yet, it is rarely known where consumer data is stored, how secure it is or how it may be traded. Privacy regulations such as the European Union’s General Data Protection Regulation (GDPR) have attempted to restore some trust, but the industry still has a way to go.

Currently, authentication is fragmented and unwieldy. It requires a mix of hardcopy documents, online login credentials and digital wallets. This is not only frustrating for consumers but leads to the reuse of passwords and PINS that make the user vulnerable to fraud. Mastercard believes there is a clear need for a verified identity that is accepted globally and across multiple digital touchpoints and doesn’t involve aggregating more information in potentially vulnerable data stores, but instead gives the individual control over their identity data.

An integrated digital ID scheme would enable the payments industry to fight fraud on a global scale. It would also meet the pressing need for a payment authentication system that consumers can access anytime, anywhere, and on any device. This joined-up approach is vital to ensure no consumer is left behind as the world continues its digital transformation.

Providing access to a singular, unified digital ID will not only streamline the identity process, but also unlock new and enhanced consumer experiences during this digital transformation. Particularly in the new breed of smart buildings and cities, where everything from travel to payment systems will be connected to a user’s identity.

What form should our digital ID take?

While the need for digital ID is well established, the form it will take is less clear. There are two main challenges that payment providers need to overcome with a potential new identity solution: onboarding new users and ensuring the digital ID is compatible with all transactions.

Placing individual consumers at the centre of their own digital interactions will ensure confidence and broader adoption of new technology payments and services. Yet, for this to be successful, the payments industry must adopt a process that is simple, familiar and easy to understand.

Fingerprint biometrics as a digital identity

The use of fingerprint authentication to unlock a smartphone is now deeply entrenched. As far back as 2016, 89 percent of users with compatible iPhones were using fingerprints to unlock their devices. The solution for a frictionless onboarding has been at our fingertips the whole time.

Payment providers can incorporate fingerprint biometric sensors directly into their new breed of smart payment cards. A biometric payment card may be a new concept, but payment providers and retailers across the world are already using contactless card technology in the payment process, so it is the next logical step. Consumers are now used to carrying a card and tapping it for contactless payments. Plus, as we have seen, consumers are used to using their fingerprint as an authentication mechanism. Perhaps biometric cards could be the catalyst for financial inclusion desired by the World Bank, as they don’t require the ownership of expensive smartphones in developing nations.

Building a chain of trust with biometrics

Continuous developments in payment regulation mean that secure authentication is imperative. Under the second Payment Service Directive (PSD2) European banking regulation, all payment transactions will soon require Strong Customer Authentication (SCA) to validate users at the point of transaction to reduce fraud and increase security for customers. SCA requires two forms of authentication for every transaction above the contactless limit. While one is generally something you have like a smart card, the second can be something you are like a fingerprint.  Using a fingerprint means that it can be used across multiple platforms and is always at hand. There should be no trade-off between convenience and privacy and fingerprint biometrics delivers on that expectation.

Biometrics can play an essential role in digital ID, significantly limiting exposure to potential fraud and criminality. The addition of a biometric sensor onto a payment card creates a secure ‘chain of trust’ that indelibly connects the user to the card. Furthermore, digital ID has the scope to be extended far beyond payments and used as a unique identifier in areas such as access, government ID and even across IoT devices.

Securing the future of the payments industry

While the world is becoming ever more cashless, commentators and analysts all agree – without a fully functioning digital ID, the payments revolution will stall. As Tony McLaughlin, Emerging Payments and Business Development at Citi put it recently: “If we fix digital identity, we fix payments”. I couldn’t agree more. Both consumers and the payments industry need a user-centric digital ID that is owned and managed by the individual, so they can unlock the full advantages of a transformative digital payment ecosystem.

Using fingerprint biometrics as a digital ID in a payment card will transform the way people authenticate transactions. This integration would enable consumers to confirm their identity wherever they are, on any device, and across every transaction. It will change the face of digital identity as we know it.

We believe that digital interactions should be privacy-enhancing, secure, intelligent, and efficient. To facilitate this, consumers require a user-centric digital identity that is owned, managed, and controlled by the individual. It is time to place individuals at the heart of their digital interactions globally.

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It’s time to press ‘reset’ on travel and expense processes

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It’s time to press ‘reset’ on travel and expense processes 2

By Rudy Daniello, EVP of Corporations, Amadeus

Travel & Expenses(T&E) is a large spend category for companies across the globe. In fact, for many firms, T&E is the second largest indirect spend category. While we all know the inherent value personal, face-to-face meetings bring, it’s important to quantify and manage the cost, especially in today’s climate.

While business travel has slowed due to COVID-19, many companies have accelerated their digital transformation during this period, especially in the way their teams work. One area that is under the spotlight as organisations look to transform digitally and control costs and processes better, is T&E.

Poor business travel spend management can frustrate staff, and lead to cost and productivity inefficiencies. Within the context of COVID-19, controlling T&E spend is likely to be even more important, so companies need a clear strategy around their travel and expenses.

To understand how organisations were assessing their T&E at this extraordinary time, Forrester Consulting conducted research on behalf of Amadeus, surveying more than 550 key decision makers involved in T&E solutions at large organisations worldwide.

The report, titled Digital Transformation For Travel & Expense: Balancing Process Efficiencies, Compliance, And Employee Experience highlights the challenges organisations face as they assess their T&E systems and processes before business travel picks up again.

The good news is that nearly three quarters (74%) of respondents agree that the improvement of T&E management processes and tools is critical to reducing costs, increasing efficiency, improving employee engagement, and forms part of their digital transformation.

All of these factors are key business objectives, so how can organisations address their T&E?

Focus on Systems

The research found that a lot of organisations are still relying on outdated systems to manage their travel and expenses. More than one in five (22%) of centralised companies still use spreadsheets to track expenses and just 15% of organisations use a cloud-based T&E solution.

Many decentralised companies also still rely on manual processes – either fully or partly – for their T&E. These outdated processes and systems add pressure on staff, managers, auditors and accountants. Reassess T&E Processes

Having the right systems in place will help rethink T&E processes, from researching hotels and appropriate transport, to making expenses claims post-trip. Travel managers surveyed difficulties around compliance-related expense tracking, reconciliation and auditing as a key challenge.

Three quarters (74%) of travel management leaders want to increase automation to reduce their reliance on manual processes. However, one in five (20%) organisations do not feel they are getting the analytical and reporting capabilities they need, despite data being a core priority.

The research shows that Human Resources (HR) and IT have key roles to play in redefining their organisations’ T&E processes.

Enable Smarter Booking

The research also finds that T&E leaders want to be able to manage the huge amount of content out there so that they can make clear decisions when making travel bookings. Multinational organisations need a global solution so that they can access the best deals and make more informed business travel booking decisions.

Integrated T&E solutions deliver cost and efficiency benefits

According to the research, those organisations that use an integrated T&E tool are much less likely to receive complaints from their traveling staff. More than a quarter (27%) of organisations that use an integrated T&E solution reported zero complaints from employees.

Integrated T&E solutions are essential for companies as they help their employees, take advantage of the best offers for the business trip. They also streamline expense processes, making it quicker and easier to claim and have their expenses approved and paid back.

Firms that do not have integrated T&E solutions report a 29% increase in delays in reimbursing expenses. Almost all (96%) of organisations interviewed that use integrated tools are satisfied with their T&E processes. Nearly three quarters (73%) of them even plan to expand or upgrade further.

Improving T&E is a team effort

What the Forrester Consulting research demonstrates clearly is that there is consensus across the board that T&E systems and processes can be improved.

Three quarters (74%) of IT leaders are focused on improving end-to-end experience of T&E processes, and 73% are committed to improving integration between T&E tools and other systems (73%).

And it’s not just IT leaders who see the value in integrated T&E solutions. More than four out of five procurement managers see improvement of T&E tools and processes as a key part of their organisation’s digital transformation, the highest of any group interviewed by Forrester.

While online conferencing has become the norm for many organisations, nothing can replace the value of face-to-face meetings. When business travel picks up again, companies with integrated T&E systems and processes will quickly see the benefits.

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Finance

Covid-19 and the rise of remote payment fraud: how do we catch a digital thief?

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Covid-19 and the rise of remote payment fraud: how do we catch a digital thief? 3

By Evgenia Loginova, co-founder and co-CEO of Radar Payments

Covid -19 is finding different ways to hurt our finances – and like the virus, the threat is invisible.

Each time we tap our payments cards or make a purchase online, there’s always a risk of getting caught out by a digital fraudster. Yet during the global pandemic, the issue has not only escalated, but the ways in which people are conned have changed to reflect new social distancing and lockdown behaviours.

Indeed, the crisis has transformed the way we buy and shop – and those that are being targeted most are the millennial generation.

What are we doing differently?

It’s all down to the way we are interacting with service providers.

Lockdown behaviour

Since the World Health Organisation issued a pandemic in March, global payment fraud went up 5% with 100 million suspected fraud attempts from the period between March – April.

According to TransUnion, the firm analysing the data, billions of people around the world have been forced to spend time at home, which has led to industries such as financial services, ecommerce and healthcare to experience disruption in ways that have not been seen for generations.

This is due to the spike in online transactions, as more people adjust to the new normal of spending less time at the shops and more time doing everything on their digital devices.  And with so many transactions shifting online – fraudsters are spending more time there too. These culprits are fully remote and are always on the lookout for vulnerable victims – as well as vulnerabilities within the payment systems.

Digital savvy criminals

Businesses that come to grips with the problem will manage to stay afloat – but they won’t be able to do it without fraud prevention tools that can identify suspicious activity without adding friction to the customer payment experience.  In other words, customers must be protected from theft – as well as the truth. They shouldn’t even know that they’re under attack in the first place. It’s all about prevention- or at least as much as what technology can provide.

Without some technological intervention, there won’t be prevention, as companies simply cannot keep up with the proliferation of digital thieves.  Culprits are operating individually or in criminal gangs or both – and usually in countries that are often forgotten by global leaders.  For example, the telecommunications sector witnessed a 76% increase in card fraud a month after the global pandemic was declared – and the top country for suspected fraud origination was Timor-Leste – how many people even know where that is? (East Timor – formerly part of Indonesia, if you must ask!). Financial services saw an 11% increase in identity theft that same period – with most suspected culprits based in war torn Syria.

Exploiting vulnerabilities

Despite their location, fraudsters are quickly adapting to consumer behaviour, and finding ways to attack. With less in-person transactions taking place, criminals are doing things like infecting online points-of-sale with malware that enables them to skim credit card details of previous customers.

Evgenia Loginova

Evgenia Loginova

From our experience with our fraud detection networks the numbers point out that missing card fraud, in particular, has shot up by 70% over the past few months. This is where people’s card details are being used by criminals to make purchases, when they are not in possession of the card. They’ve just stolen the numbers and additional critical security information such as expiry date and CVC2/CVV2.

Identity theft is also on the rise, as well as phishing and social engineering attacks. For example, in the UK alone there’s been a rise in criminals impersonating trusted organisations like the NHS or HMRC to trick people into going online and paying for services that are fake or giving away their money and information to charities and other organisations that are fake.

Local councils in Britain have noted  a 40% increase in reported scams since the start of the pandemic, while Citizens Advice believes one in three people have been targeted by a Covid scammer.

This is a problem that is too big to ignore. The moment the fraudsters have your payment details – whether they’ve stolen it or you’ve given it to them under false pretences, the problem leads to losses for the victim and the businesses and organisations too.

With Covid and lockdown, fraud has gone fully remote and everything from e-commerce and digital banking has been a target for abuse.

In this ‘new normal’ world we find ourselves, the prevention of suspicious transactions through customer profiling and enhanced analytics, use of AI and machine learning models becomes very important.

Fortunately, digital theft is now being taken seriously.  Spending on security has skyrocketed in recent years, and the sector supplying protection predicted to grow by $6 Trillion by 2021.

Businesses that survive the pandemic must be able to anticipate and strive to block 100% of the digital theft they encounter. But to win the war against these online criminals they require a robust security strategy.

Here are some tips to consider.

Security policies should be enforced internally and across payment channels and distributed networks. This includes the core and cloud networks as well.

Security gaps should be closed.  A lot of risk can be mitigated by performing regular checks and plugging security holes, settling on a unified security framework based on interoperability, centralising visibility and control, segmenting the network to restrict the fluidity of malware and high performance, and deep integration.

Invest in AI capabilities.  Artificial intelligence possesses the sophisticated power to replicate the analytical behaviour of human intelligence, as well as enable decision-making in real time and offer predictive security notifications.

Investing in AI based security systems can significantly reduce digital attacks and spot suspicious activity.  The best ones are integrated with artificial neural networks (ANN), which combined with deep-learning models, can speed up data analysis and decision-making. It also enables the network to nimbly adapt to new information it encounters in the network.

Prevent fraud in online and then investigate. It is crucial to stop fraud before it happens. As most of the payments became remote, reaction should be super fast: high-risk transactions should be declined, low-risk passed with no friction and suspicious challenged. This raises the importance of finding the balance between customer experience and risk mitigation as never before. And even with AI and enhanced analytics for complex cases an expert with natural intelligence should be equipped with all needed information for relevant and adequate decision-making.

Lingering problem

Digital crime won’t disappear as long as there’s an opportunity that criminals can exploit. As the world braces for a new wave of lockdown measures, businesses operating in the online sphere must remain vigilant and prepare for more attacks – or face losses that could be impossible to recover from during these challenging economic times.

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