In the middle and back offices, the depth and breadth of industry expertise will be a bigger driver of AI innovation than data science
By Tom McMackin, SVP, Marc Zimmerman, SVP, and Scott Kurland, MD, of SS&C
Although AI technology is increasingly being embraced by most industries to drive enhanced operational efficiencies, customer experience and financial performance, the financial services industry was actually one of its earliest pioneers. The ability to predict stock market movements has been the holy grail for institutional investors since the inception of securities exchanges. It is little wonder that this industry segment first began research with predictive analytics as early as the 1950’s and 60’s. A decade later, capital markets began to see the development of the first algorithmic models that were used to accelerate trading decisions. Today, these tools have evolved into the High Frequency Trading (HTF) systems that execute millions of transactions daily.
In very real terms, AI offers the ability to make faster and smarter decisions, translating into billions of dollars a year for financial services institutions. It should come as no surprise then that investment banks and hedge funds have been pouring significant funds into related software technology and research for years.
Investment Operations and Accounting – A New Financial Services Frontier for AI
To date, the major share of the AI spend within capital markets has been squarely focused on enabling front-office trading and customer-facing business functions, while middle- and back-office operations have remained largely unchartered territory. Investment operations and accounting systems have become increasingly sophisticated in their efforts to address the industry’s ever-changing accounting standards and regulatory compliance requirements, but thus far these applications are not ‘smart.’Instead, they are typically legacy solutions driven by hard-coded rules and processes that enable the inflow of structured data from external sources, such as counter-parties, custodians, securities exchanges,and clearing and settlement systems. Unlike front-office trading operations that utilize AI to make more enlightened decisions based on Deep Learning and Big Data analysis, the goal of the middle and back office is to perform accounting, regulatory compliance and other operational tasks with the utmost efficiency and precision.
No “Do-Overs” in the Middle and Back Office
Clearly there are big opportunities to leverage AI in the middle and back-offices. Examples include automating reconciliation processes, reducing the burden of exception management, and enabling faster, more effective remediation of identified errors. However, the middle and back-office calls for a substantially different approach to the use of AI — one that is driven as much by the depth and breadth of expertise in investment operations and accounting as it is by the AI technology itself. In the front office, bad decisions one day can be compensated by better decisions the next. Anomalies are expected as part of the asset management and trading process. Not so in the middle and back office, where numbers either add up correctly or they don’t. If they don’t, the exceptions must be quickly identified, reconciled and repaired to avoid undesired downstream consequences with regulators, auditors and stakeholders.
More Sophisticated AI Tools Don’t Always Produce More Sophisticated Results
Today’s most sophisticated, front-office trading models leverage advanced AI tools like Deep Learning with Advanced Neural Networks (ANN) to uncover new patterns, and reach insights and conclusions through interpretation of data – similar to how the human brain functions. Unfortunately, Deep Learning models are not yet an exact science. Like human brains, these tools can draw inaccurate conclusions. In the more precise world of investment accounting, there is little room for opinion — human or machine. Machine learning models must be thoroughly trained and tested to produce very specific and accurate outcomes. They must be designed to identify only appropriate patterns, then suggest or trigger appropriate actions relevant to operations and accounting processes. This takes highly specialized investment operations and accounting expertise, not only with regard to middle-to-back-office functions, but also across a continually expanding landscape of asset types, transactions, markets, regulations and industry operating models.
In the investment accounting space, machine learning can be used to reduce time and cost associated with data inquiries by providing relevant context. Once the machine learning model identifies an issue and where it resides, it can either suggest the proper course of action to resolve it, or autonomously initiate the appropriate workflow through “Intelligent Workflow Automation” (IWA). IWA technology learns from user behavior to identify and automate the appropriate workflow processes needed to locate and resolve the problem without manual intervention.For example, in the investment operations area, reconciling position holdings from custodians can be time consuming if there are differences in the quantities due to out-of-date factors. Pattern recognition algorithms can discover these breaks and resolve them quickly.
It is essential that the behaviors of IWA models are thoroughly scripted and tested by highly experienced and knowledgeable investment operations and accounting experts to ensure that target automations correctly perform the tasks at hand. No matter how sophisticated the models are, they will not produce valid results unless they are guided by specialized investment accounting and operations domain expertise to know what anomalies, parameters and drivers to look for.
Increasing the Value of AI with a Single, Unified Platform
What the financial services industry generally calls “integrated investment operations and accounting systems” are essentially a series of disparate functional applications or modules that are loosely wired together in an effort to more efficiently perform a range of middle-to back-office functions and services. To the extent they are effectively integrated, they endeavor to exchange data and automate hard-coded transactions from beginning to end in a serial sequence commonly referred to as “Straight Through Processing (STP)”. However, here no pattern recognition is involved –it is simply one specific event triggering another specific event with no enhanced intelligence.
Today’s modular investment operations and accounting systems lack the unified architecture needed to exploit the full value of AI. The full potential of machine learning and intelligent workflow can only be realized when an application can holistically recognize patterns and pinpoint exceptions across relevant functions, activities and data anywhere in the system. Only then can the system autonomously initiate the best actions or recommend the most appropriate next steps.
This process, however, is problematic where separate applications or modules have been cobbled together to look, but not really act like one. To truly enjoy the full benefit and value of AI in a middle and back-office investment setting, institutions will need a unified technology platform that provides a single database and user interface together with a rich collection of pre-integrated functions and common services. The platform also needs to be able to support all the diverse assets, transaction types and industry operating models that define an institution’s businesses. Successful solution pioneers in this new space will likely have long and successful track record in the industry, deep expertise in wide range of asset types and industry operating models, and an aggressive mergers and acquisitions strategy to continually deepen and widen that expertise.
Bottom line – AI tools have the potential to bring huge efficiency gains and cost savings to middle- and back-office investment operations, especially when embedded in software applications that singularly support ready access to all required data. However, successful deployment of these technologies also requires deep domain knowledge and expertise on the part of the application provider to truly optimize the capabilities and benefits of this innovative technology.
Digital collaboration: Shaping the Future of Finance
By Ryan Lester, Senior Director of Customer Experience Technologies at LogMeIn
With heightened economic uncertainty and increased customer expectation becoming the norm in the banking industry, it is understandable that the sector is struggling to keep afloat. Due to its precarious nature, banking institutions are trying their best to ensure they remain relevant in the competitive landscape and guarantee that their customers continue to be a priority.
When it comes to the first half of this year, the pandemic has shown how easy it is for industries to fail. Customers and companies alike had to get used to the new normal, as physical locations started to close. The banking industry felt this first hand, as banks were made to restructure how their business ran, with restricted opening hours and a wider push to motivate people to use online banking.
While some had already embraced digital options prior to the pandemic, this proved to be a stark contrast to the elderly population, who frequently visited branches to access their finances. Moving forward, banks have to adopt new methods to ensure customers get the most out of our their accounts, without their experience suffering.
Heightened Customer Expectations
When the pandemic reached its peak, people were encouraged to use online banking, as telephone contact was under strain with long waiting times and pressure mounting on contact centre agents. According to Fidelity National Information Services (FIS), which works with 50 of the world’s largest banks, there was a 200% jump in new mobile banking registrations in early April, while mobile banking traffic rose 85%.
With branches remaining closed, customers were continuously being urged to limit the amount of calls they made to the most urgent cases and consider whether they could solve their answers through mobile online banking or checking the company website. Although already being adopted in pockets of the industry, this was a real catalyst that spurred banks to up their game on digital channels and with self-service tools.
Banks are challenged with precariously balancing customer needs with the cost of personalised support. With the demographic of customers changing over the last few years, customers are becoming increasingly younger and more comfortable with technology. Influenced by the “Amazon Effect”, their expectations have raised to an all-time high, placing record strain on the sector
Customer experience isn’t just about support anymore, it’s about serving your customer at every point in the journey. Companies have an opportunity to elevate the experience they provide by moving beyond one-and-done interactions to create continuous engagements with their customers. It is starting to become a primary competitive differentiator in the market and one that doesn’t have a lot of variation. Deploying AI chatbot technology will be able to strategically help banks improve customer experience and raise the level of support that agents provide.
Digital collaboration: Working around the Clock
The benefits of adopting digital channels and self-service tools are second to none. By implementing chatbots, fuelled by conversational AI, banks will be able to help serve a wide range of customer queries and ensure they are protected from fraud and scams.
Conversational AI is exactly what it sounds like: a computer programme that engages in a conversation with a human. When it comes to service delivery, conversational AI can be deployed across multiple channels to engage with customers in ways that effectively address evolving customer needs. At a time defined by COVID-19, self-service tools such a conversational chatbots can work around the clock to solve customer queries in a concise and timely way. Of course, self-service tools won’t completely replace human agents in the banking industry, but they will help companies re-distribute customer traffic and workflows in ways that enhance customer experience. Self-service tools fuelled by conversational AI can also improve employee experience because service employees can handle fewer, but higher-level service tasks that chatbots might escalate to them.
Adopting new tools to help facilitate consistent and concise answers and help maintain customer experience is on the forefront of many industry minds. Banks such as the Natwest Group have seen this first-hand and are testament to the benefits that a good digital experience can provide. Simon Johnson, Capability Consultant, Digital at NatWest Group highlights NatWest’s use of digital tools during lockdown, “Over the last few months, we’ve learnt how to use digital tools to help our employees remotely. From a banking perspective, there have been a lot of changes including base rates, waive fees and the best ways of contacting our vulnerable customers, ensuring we keep them protected from frauds and scams.
“By introducing our Bold360 chatbot interface, Ella, we’ve been able to get relevant information out quickly, apply the best practice and ensure that our customer journeys are being developed correctly. Due to the volume of questions, some of our customers were finding themselves waiting longer than usual. So digital channels become essential to helping reduce the wait time. Using Bold360, we were able to mitigate issues and answer questions in a more timely way through our chatbot.
“Moving forward, as we open more digital services, we are analysing our data to see if customer will return back to their usual way of banking, now that they’ve seen what a good digital experience can provide. Either way, with Ella, we are ready.”
Chatbots and Humans: The Best Option for Customer Service
Over the last year, banking institutions have recognised the power that digital collaboration can have to their success. Delivering exceptional customer service and support is key for any business wanting to stay competitive in today’s market and banks are especially challenged with precariously balancing customer needs with the cost of personalised support. Leveraging the right technology, such as AI-powered chatbots, will enable the banking industry to provide better support and a more robust customer experience in the long term. Other institutions must follow suit, or risk becoming obsolete.
A sleeping digital giant wakes? 4 key trends accelerating payments transformation in the US
By Lauren Jones, International Payments Ambassador, Icon Solutions
The US payments industry is undoubtedly ripe for change. Before the unprecedented shock of COVID-19, digitization and payments transformation initiatives had been organic, piecemeal and predominately the preserve of the largest banks.
Now, increasing pressure means that financial institutions of all sizes are working to define a digital strategy to unlock new opportunities, drive business value, and stay competitive. But beyond the immediate impact of COVID, what underlying trends are accelerating digitization in the US?
- Real-time payments – the stimulus for change
Real-time payments have been met with a degree of caution by US financial institutions. Risking traditional profit generators in return for potential revenues down the line is a gamble many have not been willing to take. But immediate payments are coming to the US whether banks like it or not.
Major payments infrastructure providers, including NACHA and The Clearing House (TCH), have moved to encourage immediate payment adoption in recent years. But the Fed, frustrated with a slow rate of progress, has announced that it is pressing ahead with the implementation of its FedNow system (despite significant industry objection). Although the Fed’s true intentions are open to interpretation and this may just be a play to accelerate private initiatives, it is a clear signal that they mean business.
This means holdouts risk their own ‘Kodak’ moment if they miss the huge opportunities in front of them by fixating on traditional revenue streams. Banks are in a position to support innovation across entire industries such as healthcare, which could be released from the constraints of paper-based bureaucracy and slow, expensive transactions.
Another opportunity that can be unlocked via instant payments is ISO 20022 (used in the TCH RTP system). It is the future of payments messaging standards and can greatly enhance various payments processes through increased data-carrying capabilities. More importantly given the current climate, citizens reliant on federal or state support can benefit from RTPs combined with additional data to immediately access emergency funds.
- The kids are growing up
The US is getting older. Consumers who were 10 when the iPhone first launched are now 23. This means we are seeing a ramp-up of digitally native Gen Z consumers (roughly those born between 1995 and 2010) accessing banking services.
Demographics are an inexact science and not perfect predictors (there are technophobe college students and 100-year-old Instagram influencers), but we can detect noticeable trends.
Younger customers don’t usually choose a bank because there is an ATM in their neighbourhood, a slightly better interest rate or an advert in the newspaper. Rather, a strong digital presence, personalised tools, rewards and experiences, and the trusted recommendations of friends and family, will have a more significant impact on customer acquisition.
Banks must look at the effect this will have on their longer-term digitalization strategy and be able to segment what this emerging customer base might want and how they will interact in years to come.
- Checkmate? Evolving corporate requirements
Corporate treasurers are people and their experience of seamless, immediate payments in their personal lives shapes expectations in the workplace. Although check usage for business-to-business (B2B) transactions is still the norm in the US and barriers remain, corporates are increasingly demanding the ability to transact in a real-time, omnichannel environment, 24×7.
The benefits are clear. Corporate treasurers stand to enjoy enhanced liquidity management and transparency, greater control over payments and enhanced data for reconciliation purposes. And for consumers, alternative digital payment options such as buy now pay later promote choice and flexibility.
- Increasing competition
A significant consequence of emerging consumer and business demand for digital offerings is the increase in competition from fintechs, technology giants and other third-parties. Traditionally, incumbent banks have enjoyed the advantage of consumer trust to offset more limited innovation. But as consumers become more comfortable entrusting their financial transactions to non-banks, banks must differentiate and digitize to remain competitive.
Data is where the technology giants excel, and their ability to personalise experiences and emotionally connect with their users is unprecedented. Banks need to learn from the positive aspects of this model to better understand their users and deliver meaningful, useful products and services.
For data to become the cornerstone of a banks’ customer relationship and take services to the next level, breaking the channel silos and extracting value from a comprehensive dataset will be decisive. But with only 18% of banks reporting that they are in the process of shifting from a transactional revenue model to a data-driven revenue model, this work has some way to go.
Taking customer propositions to the next level
Customers now expect services that work for them, not their banks. All banks, no matter the footprint, need to move quickly to offer a broad digital service platform that adds value to both the customer and the bank.
By defining a robust payments transformation strategy, banks of all sizes can remain fiercely competitive by rapidly lowering costs, unlocking revenues and promoting innovation
Return to Work Doesn’t Mean Business as Usual When it Comes to Travel and Expense
By Rob Harrison, MD UK & Ireland, SAP Concur
The last few months have been an exercise in adaptability for businesses across the UK. With the sudden mandate to work from home, company processes that were ingrained in employees’ day-to-day routines were either put on hold or turned upside down. The new office normal now includes virtual meetings, conversing through instant messaging instead of in the hallway, and the redefining of “business casual” attire.
Many of the processes that have undergone changes fall into the category of travel and expense. With most business travel on hold and the nature of expenses changing, finance managers have had to adjust policies and practices to accommodate the new world of work. Recent SAP Concur research found that 72% of businesses have seen changes in the levels and types of expenses submitted, but only 24% have changed their policies to support this. Examples of travel and expense related changes that were made at the beginning of work from home mandates include:
- A halt to business travel and its associated expenses.
- Temporarily ending expensed meals for business lunches, dinners, or in-office meetings.
- Increase in office expenses like monitors and chairs as employees furnish their home offices.
- New expenses to consider like Internet and cell phone bills for employees who must work from home.
Now, as companies begin thinking about return to work plans, finance managers are discovering it’s not simply business as usual again. SAP Concur research found that many expect finance will return to normal quicker than general workplace practices, but vast majority see the process taking up to 12 months. New policies and processes need to be put in place to accommodate travel restrictions and changes in expenses. While finance managers need to stay flexible as the business environment continues to evolve, spend control and compliance should still be a high priority.
Here are a few questions that can help finance managers prepare for return to work while keeping control and compliance top of mind:
- What will travel look like for the company? Finance managers must work with travel and HR counterparts to determine the need for employee travel, if at all, and how to keep employees safe. At SAP Concur, we surveyed 500 UK business travellers and found that health and safety is now seen as more than twice as important than their business goals being met on trips (34% versus 16%. Clear guidelines should be developed, even if they are temporary or evolving, so it’s clear who can travel, when they can travel, and how they can travel. Duty of care plans should also be re-evaluated and businesses should ensure they know at all times where employees are traveling for business and how they can communicate with them in the event of an emergency.
- Who needs to approve travel and expenses? While it may be temporary, businesses may have to implement a more stringent approval policy for travel and other expenses. Due to health concerns related to travel and the need to conserve cash flow, business leaders like CFOs may want to have final approval over all travel and expenses until the situation stabilises. To help ensure new approval processes don’t cause delays and inefficiencies, finance managers should implement an automated solution that streamlines the process and allows business leaders to review and approve travel requests, expenses, and invoices right from their phones. According to SAP Concur research, 11% of UK businesses implemented some automation of financial processes in response to COVID-19. This is definitely set to increase post-pandemic.
What types of expenses are within policy? Prior to social distancing, employees may have been allowed to take clients out to dinner. In-person team meetings held during the lunch hour, may have included expensed lunches. As employees return to work, finance managers need to determine if these activities and expenses will be allowed again. Clear guidelines must be put in place and expense policies need to be updated to reflect any changes.
- What happens to home office items that were purchased? While new office equipment may have been purchased for employees’ home offices, they remain the business’s property and what to do with them as employees return to work needs to be determined. Perhaps employees will continue to work from home a few days a week and need to keep the equipment to ensure productivity. However, if a full return to work is expected, finance managers have options that can maximise their asset investment and possibly save the company money, like replacing old office equipment with the new purchases, reselling to a used office furniture company, or donating to a non-profit.
- How can cost control be ensured? For many businesses, cash flow will be tight for the foreseeable future. Spend needs to be managed to help ensure recovery and stability. An important aspect of controlling costs is having full visibility of expenses throughout the company. Implementing an automated spend management solution that integrates expense and invoice management brings together a business’s spend, giving finance managers an understanding of where they can save, where to renegotiate, and where to redirect budgets based on plans and priorities.
Once finance managers have asked themselves the questions above and determined how they want to approach travel and expense procedures, it’s vital they create guidelines and communicate clearly to employees. Compliance can only be ensured if employees have a clear understanding of what has and has not changed with travel and expense policies and what’s expected as they return to work.
Digital collaboration: Shaping the Future of Finance
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