By Brannan Coady, CEO Netsells Group, CPO YourParkingSpace,
Even before 2020, FinTech was fundamentally transforming the way financial services operate. Established market players have been forced to step up their use of technology to keep pace with challenger banks and FinTech start-ups.
New market entrants are clearly following on of two strategies – they either aggregate existing services onto a unified digital platform, or break them down into niche digital products serving small, but well defined market segments.
This bundling and unbundling has become a familiar pattern of innovation across multiple industries ever since the .com boom.
However within the context of FinTech, there are unique ecosystem pressures that are driving new products and services. For anyone looking to work with or build a fintech business, these are the three trends I would take note of to drive my strategy in 2020:
Digital Transformation Will Be Non-Neogtiable
The abrupt move to digital during the first few months of 2020 came as the biggest shock to incumbents that relied heavily on outdated processes, multiple intermediaries and legacy systems.
For example, homebuyers in the UK at the beginning of the pandemic faced month long delays for mortgage approvals. This was blamed on the rise of homeworking, however delays also result from the fact that multiple parties interact with manual updates throughout the transaction lifecycle.
This is further exacerbated by the fact that risk appetites across the sector have been depressed, but assessing risk is still in many cases reliant on manual investigations by underwriters.
My feeling is that having had these issues exposed in such a painful manner, traditional banks will have a healthy, if not voracious, appetite for rapid technology implementation over the coming years. This matter will be even more pressing given the fact that most banks have several start-ups in their rear view mirror for each service in their portfolio.
We are already seeing a massive interest in the potential of Blockchain to streamline the home buying process, as well as the way financial institutions handle mortgages. If data can be held by multiple parties that is trusted, accurate and secure, process steps can be automated and reduce the complexity, time and cost for all parties.
I’m also very excited about the potential of AI to increase speed and further reduce risk through document analysis and intelligent decision making. It would be a shock if we do not see mass-adoption of multiple emerging technologies over the next few years.
Regulation Will Become a Driver of Innovation
As competition and innovation heats up, regulators will have to become part of the driving force behind new services and products.
There are two sides of the coin at play here, as of course regulators are in place to stop abuse or misuse, but they also have to become conscious of the potential for regulation to impede progress.
As new technologies are introduced, there is a clear opportunity to rethink how regulatory frameworks might actually support the development of new propositions by offering clear guidance to those looking to build in the FinTech space.
An example of this is the Payment Services Directive (PSD), which aims to encourage innovation in the payments industry and outlines the criteria and obligations for payment providers and users.
PSD2, in particular, forces providers to open up their data and services to third-parties which has been transformational for FinTechs and traditional banks alike, allowing for better customer outcomes and more streamlined internal processes.
The next phase of post-pandemic fintech innovation will require regulators to instill confidence in both consumers and those creating solutions.
Digital Payments Will Continue To Dominate
Despite its boring image, payments remains one of the hottest areas of fintech investment, with €55.6bn worth of exits since 2013.
Digital wallet services such as Apple Pay and Google Pay leverage well understood technologies such as near-field communication (NFC) technology and biometric authentication to make the consumer payments experience seamless and secure.
However there is more still to come from consumer-facing solutions, especially as the demand for mobile payments have skyrocketed dramatically over the last 6 months and shows no sign of slowing down.
We are starting to see solutions emerge that do away with card machines and hardware altogether, facilitating purely mobile to mobile transactions enabled by a mobile application installed on retailers’ and consumers’ devices.
Alongside consumer-facing propositions, we are also seeing an expanding desire for the payments ecosystem itself to be productised and opened up.
API-driven, banking-as-a-service platforms are using the opportunities provided by regulations such as PSD2 to enable payments by directly connecting the merchant and the bank, reducing the number of intermediaries and therefore costs.
This openness is also providing opportunities for collaboration between banks and fintechs and actually provides a new type of opportunity for incumbents with a large existing customer base. Banks now have the ability to become true platforms, bundling up and connecting services provided by a multitude of fintechs
Entersekt provides clarity on Secure Remote Commerce authentication techniques for financial institutions
New whitepaper from Mercator available: Revisiting Authentication in the Age of SRC and EMV 3-D Secure
Is it time for a new authentication strategy in light of international mandates for Secure Remote Commerce (SRC) and EMV 3-D Secure? This is the question posed to financial institutions (FIs) in a new Mercator Advisory Group whitepaper entitled Revisiting Authentication in the Age of SRC and EMV 3-D Secure.
The paper, licensed by Entersekt for public distribution, delves into the role SRC and EMV 3-D Secure will play in the European Union’s Strong Customer Authentication (SCA) requirements under the revised Payment Services Directive (PSD2). It finds that now would be the ideal time for FIs to rethink customer authentication strategies, particularly with the deadline for full SCA compliance approaching on the 1st of January 2021.
“Consumers face an increasingly complex authentication landscape, which can vary greatly depending on the communication channels they use,” said Frans Labuschagne, UK&I country manager at Entersekt. “Multiple authentication techniques create unwanted friction and uncertainty. This paper gives actionable advice to FIs that need to keep security top of mind while also providing a good user experience.”
All card issuers competing for top of wallet will find useful insights in this whitepaper, which states that, “Since it is well recognised that convenience is critical to consumer adoption, it is time for financial institutions to rein in the multiplicity of authentication methods they use to identify account holders and even employees.”
Some of the key findings include:
- The lack of an integrated solution results in an inconsistent user interface.
- Inconsistency not only detracts from a customer’s experience but is likely to disrupt any cross-channel implementation plans an organisation might have.
- A customer who is presented with the same authentication technique for every interaction becomes more familiar with that technique.
- The authentication technique should be implemented on a smartphone, which 89% of UK residents between 16 and 75 already have.
- Consumers increasingly trust smartphone-based biometrics and are growing accustomed to using smart speakers for a range of use cases.
To download the whitepaper in full, please visit: https://www.entersekt.com/resources/white-papers/revisiting-authentication-src-3ds
This is a Sponsored Feature
Using AI to identify public sector fraud
When it comes to audits in the public sector, both accountability and transparency are essential. Not only is the public sector under increasing scrutiny to provide assurance that finances are being managed appropriately, but it is also vital to be able to give early warnings of financial pressures or failures. Right now, given the huge value of funds flowing from the public purse into the hands of individuals and companies due to COVID measures, renewed focus on audit is essential to ensure that these funds are used for the purposes intended by parliament.
As Rachel Kirkham, former Head of Data Analytics Research at the UK National Audit Office and now Director of AI Solutions at MindBridge, discusses, introducing AI to identify and rectify potential problems before they become an issue is a key way for public sector organisations and bodies to ensure public funds are being administered efficiently, effectively and economically.
The National Crime Agency has warned repeatedly that criminals are seeking to capitalise on the Covid crisis and the latest warnings suggest that coronavirus-related fraud could end up costing the taxpayer £4bn. From the rise in company registrations associated with Bounce Back loan fraud, to job retention scheme (furlough) misuse, what plans are in place for government departments to identify the scale of fraud and error and then recoup lost funds?
There is no doubt that the speed with which these schemes were deployed, when the public sector was also dealing with a fundamental shift in service delivery, created both opportunities for fraud and risk of systematic error. But six months on, while the pandemic is still creating economic challenges, the peak of the financial crisis has passed. Ongoing financial support for businesses and individuals remains important and it is now essential to learn lessons in order to both target fraudulent activity and, critically, minimise the potential loss of public funds in the future.
Timing is everything. Government has an opportunity to review the last 6 months’ performance and strengthen internal controls to ensure that further use of public funds is appropriate. Technology should play a critical role in detecting and preventing future fraud and error.
If the public sector is to move beyond the current estimates of fraudulent activity and gain real insight into both the true level of fraud and the primary areas to address, an intelligent, data-led approach will be critical. The use of Artificial Intelligence (AI) in public sector IT systems can be used to detect errors, fraud or mismanagement of funds, and enable the process changes required to prevent further issues.
HMRC is leading the way, using its extensive experience in identifying and tackling tax fraud to address the misuse of furlough – an approach that has led to many companies making use of the amnesty to repay erroneous claims. Other public sector bodies, especially smaller local authorities, are less likely to have the skills or resources in place to undertake the required analysis. If public money is to be both recouped and safeguarded in the future, it is likely that a central government initiative will be required.
Data resources are key; the government holds a vast amount of data that could be used, although this will require cross-government collaboration and co-operation. It is possible that the delivery speed of COVID-19 responses will have led to data collection gaps – an issue that will need rapid exploration and resolution. It should be a priority to take stock of existing data holdings to identify any gaps and, at the same time, use Machine Learning to identify anomalies that could reveal either fraud or systematic error.
In addition to identifying fraud, this insight can also feed back into claims processes providing public sector bodies with a chance to move away from retrospective review towards the use of predictive analytics to improve control. With an understanding of the key indicators of fraud, the application process can automatically raise an alert when a claim looks unusual, minimising the risk of such claims being processed.
While many public sector bodies may still feel overwhelmed, it is essential to take these steps quickly. Even at a time of crisis, good processes are important – failing to learn from the mistakes of the past few months will simply compound the problem and lead to greater misuse of public funds. The public sector, businesses, and individuals need to learn how to operate in this environment, and that requires the right people to spend time looking at the data, identifying problems and putting in place new controls. With an AI-led approach, these individuals will learn lessons about what worked and what didn’t work in this unprecedented release of public funds. And they will gain invaluable insight into the identification of fraud – something that will provide on-going benefit for all public sector bodies.
Why dependency on SMS OTPs should not be the universal solution
By Chris Stephens, Head of Banking Solutions at Callsign
In our day-to-day lives, SMS one-time passwords, also known as OTPs, have unintentionally become the default authentication factor when carrying out high risk and confidential transactions online. Banks, telcos, and businesses are opting for this method as SMS OTPs are relatively quick and simple to put in place. In our digital age, this solution works for the majority of users, who more often than not possess a mobile phone and are familiar with the user experience. As a result, companies are using them to securely authenticate both their customers and employees.
When looking into SMS OTPs, businesses should consider the bigger picture and how time- and cost-efficient solutions are as a whole by taking into account other key elements that might have been neglected in the past, such as hidden fees and security vulnerabilities. Apart from this approach, there are also other options better suited to different business needs – the European Authority (EBA) has already recognised other forms, such as employing the secure binding of a device to achieve possession and the use of behavioural biometrics as an inherence factor. For example, earlier this year Google officially began moving away from SMS OTP-based authentication. Whilst in the UK both the Financial Conduct Authority (FCA) and UK Finance have recommended banks ought to reduce their dependence on its use in the longer-term. Whereas, in the past, financial institutions were choosing to use this solution because it enabled them to save time on becoming compliant with the PSD2 Strong Customer Authentication (SCA) regulation.
It is common knowledge that SMS OTPs are not without their flaws, and with the extended deadline for SCA for e-commerce less than a year away (September 2021) – is now the best time for the industry to look elsewhere for more intelligent approaches to authentication?
SMS as the go-to solution
Fraudsters are sophisticated criminals, who attack the weakest points in the system – they have observed that banks and businesses heavily rely on SMS OTPs for 2FA (two-factor authentication) transactions, which is why they continue to abuse and weaken existing systems and exploit these solutions for their own benefit. Fraudsters commonly practise SIM-swap – where they steal personal information about the victim and then contact the target’s mobile operator pretending that their phone has been lost or stolen. With lockdown rules constantly changing, not all customers are able to easily visit stores right now, therefore operators are dependent on mobile-authentication channels that are more susceptible to this type of manipulation to service their customers.
SIM-swap fraud can easily be done. As soon as the fraudster has duped the mobile operator, a number transfer is authorised and then activated on a new SIM card – it works by granting cybercriminals access to the victim’s number and consequently all one-time passwords and authentication codes that are sent to that number. In March 2020, Europol warned that SIM-swap scams are a growing problem across Europe, following an investigation that resulted in the arrest of 12 suspects associated with the theft of more than €3 million ($3.3 million).
However, consumers and businesses need to be aware that SIM-swap fraud is not the only method cybercriminals are deploying to intercept OTPs from their victims during the pandemic and beyond.
Spotting a scam
SIM-swap attacks are not the only method scammers are using, there is also a growing number of cases that take advantage of malware and remote access applications to steal SMS OTPs. They do this by socially engineering individuals to download remote access apps or hidden surveillance apps to grant access to the victim’s device, without coming into contact with it. The cybercriminals can, therefore, directly read their messages or secretly record all their texts and phone calls to another device. The unknowing victim’s personal messages, including OTPs, are tapped into by the fraudster using the same approach as SIM-swap attacks. However, this time they also have direct access to the target’s device.
Several different parties are involved in the delivery of OTPs and at each stage of the process there is an opportunity for fraudsters to capture messages. There is also the potential mass compromise as a result of hidden vulnerabilities in the SS7 network and the attack surface to consider. With all these in mind, banks need to have a good overview of all data sub-processors to allow them to adopt the most suitable security controls, such as multi-factor authentication (MFA), audit logs, and dashboards.
Watch out for hidden costs
It comes as no surprise that intercepted OTPs result in fraud losses, which quickly increase as hidden fees go unnoticed over time. Beyond the upfront costs of SMS OTPs, such as cost per text, there are also several hidden costs that are difficult to budget for and avoid. They are typically the result of the domino effect of the aforementioned issues – forcing businesses into a reactive mode that is tricky to handle.
As an example, where drop-offs take place in an authentication journey, including when SMS texts are not received, financial institutions need to be ready to manage an influx in calls to their customer service helplines and the associated fees. Or else the customer may decide to use another card to make the payment, which is worse for the bank. This is due to the fact that customers are likely to abandon the use of a card when they are fed up with a customer journey that involves too much unnecessary friction. These abandonments lead to a decrease in interchange fees for banks and could even potentially reduce the customer base for merchants.
Evaluating the user experience
Whilst most consumers possess a mobile phone, SMS is not a reliable solution for everybody. For instance, SMS OTPs are not accessible to those living in remote or low-service locations, who may struggle to receive SMS alerts. This overall experience is also cumbersome as it takes roughly 30 seconds of transaction time for the text to be delivered, compared with the almost instantaneous transactions experienced by alternative authentication approaches, such as biometrics.
In this digital age, businesses are constantly adapting to accommodate different generations including Gen Z who are digital natives – so mobile use is only going to increase and, along with it, the volume of transactions taking place on these devices will also grow. This goes hand in hand with the ever-changing needs and expectations of customers as they look for hyper-personalised online experiences as the new norm. Yes, SMS OTPs are mobile-first, but they do still require the user to switch to another app to view the SMS so they can complete the transaction, which can be annoying for the customer as it interrupts the e-commerce user journey. After a friction-filled experience, it would be unsurprising if the user then decides to abandon the transaction. With this and other existing security implications in mind, the EBA recommends banks adopt other options.
Benefits of behavioural biometrics
Every person has their own unique behaviour and habits when swiping across the screen, which can be tracked through the analysis of the data signals captured from hardware sensors when the user engages with their device. These signals are crucial to designing user features such as finger movement, hand orientation, and wrist strength. Together, artificial intelligence and machine learning provide us with the capability to analyse this information to develop a personalised prototype of that user’s swipe behaviour, which only takes milliseconds to confirm whether the customer is who they say they are. This immediately allows the bank to seamlessly carry out appropriate security actions and stop fraudsters in their path before they can even begin using a target’s device.
Behavioural biometrics is ideal for positively identifying an individual and also effectively identifies bad actors. Including when cybercriminals use technologies, such as bots or remote access Trojan (RAT) software, to control transactional flows without the user being aware. This approach to biometrics works on both high- and low-end devices and helps to protect potential victims against both blind (where the fraudster has never observed how the user swipes their phone) and over-the-shoulder attacks (where the fraudster has been able to observe the victim’s swipe movements). Both forms of attack can be detected unique algorithms, with an accuracy rate of 98%; by layering in device intelligence and locational habits it is the most accurate and robust identification method currently available on the market. By preventing criminal access, even when the attacker has observed the user’s behaviour, it offers an added level of security to businesses and banks that other traditional methods, such as a PIN or password, cannot.
In order for organisations to maintain a competitive edge and successfully navigate through the pandemic, they will need to deliver hyper-personalised journeys to meet consumers’ expectations. They are increasingly looking to bank with or sign-up to services that offer a secure and bespoke service that meets their daily needs during and beyond the pandemic.
Therefore, a holistic approach to security empowers businesses to take back control of their fraud and authentication management. Unfortunately, single point solutions, like SMS OTPs, do not allow businesses to scale or provide enough flexibility to meet these requirements. By adopting a strategic, and intelligence-based, approach financial institutions and organisations will be able to upgrade security measures and enhance the user experience – whilst keeping IT spend low.
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