IBSi Blogs

Trade surveillance departments are under intense pressure from regulators to catch trade market abuse and fraudulent activity. But monitoring is becoming increasingly complex.

by Paul Gibson, Business Development Director, KX

Financial institutions must monitor activity relevant to their specific business, this means checking for market abuse, fraud, market disruption and fair practice as well as more malign abuses such as money laundering to support criminal activities like terrorism and people trafficking. This often means analysing vast amounts of both historical and real-time data, in a variety of formats from trade data to electronic communications. Analysts are becoming weighed down by large amounts of alerts and investigations, many of which prove to be unnecessary when other factors are considered.

To deliver a successful trade surveillance programme that satisfies the rigour of the regulators and the efficiencies demanded by the business, a consolidated approach is required. It must be effective across all lines of business for the detection of emergent, systemic and often unknown risk, and take a proactive approach to make sense of all of the interactions, dependencies, changes, patterns and behaviours across the entire trade lifecycle.

Cross-Product Analysis

Organisations need a platform that can process vast amounts of data from multiple streams in real-time, allowing users to make decisions on alerted behaviours much more effectively with significantly greater efficiency. This means using cross-product analysis to identify errors, automated techniques to reduce false positives and machine learning to extract insights from both historical and real-time data.

Traditional instrument-by-instrument trade surveillance techniques do not typically extend their analysis to related products. This means that in certain areas, such as credit and rates, the links between the topics and how they are affecting one another go unseen. This is opposite to risk management techniques across the same technologies where trade dependencies are closely monitored.

As such, it is important to incorporate risk management elements, such as benchmark and sensitivity measures to help identify potential abuse over a range of instruments. This enables products to be broken into their risk fundamentals and effectively ‘look through’ to the underlying securities in an analysis. In looking for evidence of manipulation of a Financial Risk Advisor (FRA), for example, the analysis may extend to monitor both futures and interest rate swaps too.

Reducing False Positives

The more information available to businesses means the more insightful judgements can be made. In regard to false positives, the presence of surrounding data can help contextualise results by automatically classifying high volumes of alerts. Analysis can then determine which are material and which are not. False positives reduction techniques fall into three areas:

• Data Filters – Filtering out specific data or activity that may not be applicable. For example, excluding immediate-or-cancel (IOC) orders from Spoofing profiles.
• Use of Dynamic Thresholds/Benchmarks – Replacing static thresholds with automatically adjusting parameters that reflect evolving market conditions and changing behaviours, not only of individual traders but across the market.
• Alert Feature Overlays – Including surrounding factors for context in assessing alert severity. For example, factoring in change in portfolio concentration when monitoring potential insider trading.

When used together, these factors help avoid unnecessary and time-wasting alerts that distract analysts from the more important and pressing investigations. Thereby, optimising both operational efficiencies and effectiveness for mitigation of true risks.

Future of Trade Surveillance relies on Machine Learning

From calibration to error reduction, machine learning enables a variety of business practices to be improved. Detection rates can be continuously refined using a blend of supervised learning, unsupervised learning and feature extraction techniques from the historical data store.

Supervised learning uses analyst feedback and assessment of historical results to train models and improve their accuracy. Unsupervised learning works on its own to discover the inherent structure of unlabelled data, using techniques like One-Class Support Vector Machines (SMVs) to detect anomalies to help classify results based on distributions and similarities.

SVMs establish normal behaviour by learning a boundary and then adding a score to the results, based on their distance from that boundary. This adjustment can then guide analysts on what investigations to prioritise. Indeed, the benefits of AI and machine learning are well documented, but their application for improving detection rates in trade surveillance is limited.

Regulators are still hesitant to allow machines to determine whether an activity is suspicious or not. This means that the majority of what we are seeing is a supervised learning approach. However, the regulatory landscape continues to evolve and the demand for real-time decision-making is mounting. Therefore, organisations will need to make a shift in mindset and capitalisation of narrow AI with unsupervised machine learning if they are keen to detect fraud effectively and accurately.

As a result of the ever-evolving market abuse tactics being detected, and which need to be prevented, the requirements for strong trade surveillance are more demanding now than ever. For firms, this increased complexity requires them to adopt a consolidated solution that delivers accurate insights when it’s most valuable – at scale both historically and in real time, enabling users to analyse data at a breadth and scale that wasn’t previously possible.

The flexibility of a high-performance streaming analytics platform is a game-changer for real time intervention where necessary and the timely flagging of abnormal behaviour based on large amounts of historical data. By using this technology, firms can take a proactive approach in their response to abnormal behaviour in as quick as microsecond, instead of reacting when it is too late. By doing so, firms can work to improve detection rates and make significant savings through fewer false positive cases and ensure operational efficiency is met.

For several years, the financial sector across the world has been undergoing a digital transformation. In a socially distanced world, the pandemic created more opportunities to innovate new digital financial services, while also uncovering the gaps in the Indian financial system, such as the inaccessibility of credit to Micro, Small, and Medium Enterprises (MSMEs). MSMEs are vital cogs in the growth engines of the Indian economy, contributing to about 30% of the GDP.

by Lalit Mehta, Co-founder & CEO, Decimal Technologies

However, during the pandemic, numerous MSMEs have suffered due to the absence of access to credit. The MSME credit gap approximately amounts to a monumental $240 billion due to traditional institutions’ lack of flexibility and their inability to effectively leverage the available user data and viably reach the semi-urban and rural areas.

This, however, is not just a problem, but also an opportunity. There is immense potential in the MSME segment for banking institutions as they keep adopting digital and tech innovations. As we step into the year 2022, let’s look at how this opportunity might play out within the financial sector.

Open Banking

Open banking is a solution that is emerging as a way to completely transform the way credit is disbursed, making it more suited to the financial situations of MSMEs. Open banking refers to a system where banks and other financial institutions allow third parties, such as fintech companies, to access user data via secure Application Program Interfaces (APIs). Not only can the APIs enable fintech partners to build new services that are more efficient and accessible, but also allow traditional financial institutions to offer experiences fit for the digital age.

Open APIs have the capability to help financial institutions digitise the process of lending and address the growing credit demand. They can also help with some much-needed customisation in the offerings, thereby catering to specific needs that might not be addressed in their entirety by a single legacy product. Artificial Intelligence (AI)-based solutions offer flexibility that suits the borrowers’ needs that might not always be feasible for traditional processes to identify or address.

Risk Assessment

The value of approved and disbursed loans is mainly determined by how an individual or business is likely to pay it back. This is why risk assessment, or determining how likely an individual is to default is critical for the entire sector, and this is where AI and Machine Learning (ML) can change the game. The AI/ ML components employed by FinTech firms can match the customer with the lender without minimal to zero manual intervention, solving one of the key problems of the lending industry- that of risk assessment. This is done with the assistance of detailed, user-friendly credit assessment memos which allow lenders to practice controlled yet faster risk assessment.

With the help of AI and ML, banks can understand how an individual’s or a company’s recent financial behaviour deviates from past behaviour, and therefore get early insights into potential causes of concern. In this scenario, having early insights enables financial providers to take action with a relevant response – i.e., reassessing the approved loan amount or declining a loan.

Maximising Profits

For years, banks and other lenders have been using computer systems to automate more and more of the loan process. With the massive growth witnessed by businesses on the back of new-age technology, many institutions are now trying to fully automate the process. Adoption of AI results in an enhanced borrower experience and assists in making informed decisions with utmost certainty. It eliminates administrative expenses and delays to maximize the amount of profit for every loan created. Removing human bias, decisions will increasingly be based on verified customer data like their monetary status and accuracy, giving little room for error and helping businesses focus on other aspects of the lending process that still require human attention.

The banks will also have the liberty to consider a more proactive approach towards the onboarding of new customers. During the loan application phase, AI and ML are often used to anticipate credit needs by analyzing credit line usage and understanding historical data patterns. For instance, an agricultural business is likely to have seasonal credit needs; these needs can be modelled to understand typical versus atypical patterns.

Better Banking Experience

An increase in the integration of AI and ML will also mean the elimination of human intervention. Decisions made by humans are almost always influenced by biases which may end in either a poor experience for the customers or losses in terms of loan frauds for financial institutions. AI-driven tools run the available data against a group of rules to work out the borrower’s acceptability, thereby speeding up the process, and also ensuring security for the institution.

By understanding how a company’s recent financial behaviour deviates from past behaviour, banks can detect or create opportunities for expanding their business relationship with the customer – or get early insights into potential causes of concern. In both these scenarios, having early insights enables financial providers to take action with a relevant response – i.e., extending credit proactively or declining a loan.

Conclusion

2022 is set to witness a further increase in the adoption of AI and ML. This will lead to a bridging of the credit gap that the MSMEs are suffering from, resulting in further bolstering of the economy. This will also exponentially enhance customer experience while cutting down on the risks. This New Year will be a better year for banking.

While disruption from the pandemic has highlighted many opportunities for development across multiple industries, it has especially emphasised the need for digital transformation within the financial services market.

by Hans Tesselar, Executive Director, BIAN 

At the beginning of the pandemic, financial institutions realised what it meant to be truly digital. Research from EY found that 43% of consumers changed the way they banked due to Covid-19 favouring a more digital approach. Almost overnight, banking organisations were forced to shift their focus towards becoming more agile, resilient and, above all, digital.

Despite the importance of transformational efforts, the financial services industry continued to come up against obstacles, highlighting the need for urgent industry action.

Digital-First Customer 

The financial services sector has realised that without the comprehensive digital infrastructure necessary for today’s environment, they are unable to bring services to market as quickly and efficiently as they would like – and need. The extensive use of legacy technology within banks meant that the speed at which these established institutions could bring new services to life was often too slow and outdated.

This challenge is also complicated by a lack of industry standards, meaning banks continue to be restricted by having to choose partners based on their language and the way they would work alongside their existing ecosystem. This is instead of their functionality and the way they’re able to transform the bank.

To move forward into the ‘digital era’ and continue on the path to true digitisation, banks need to overcome these obstacles surrounding interoperability. Additionally, with today’s digital-first customer in mind, financial institutions need to take advantage of faster and more cost-effective development of services. Failing to provide these services may force customers to take their business elsewhere.

One thing is certain, consumers will continue to prioritise organisations that can offer services aligned to both their lifestyle and needs.

Coreless Banking 

The concept of a ‘Coreless Banking’ platform is one that supports banks in modernising the core banking infrastructure.

This empowers banks to select the software vendors needed to obtain the best-of-breed for each application area without worrying about interoperability and being constrained to those service providers that operate within their language. By translating each proprietary message into one standard message model, communication between financial services is, therefore, significantly enhanced, ensuring that each solution can seamlessly connect and exchange data.

With the capacity to be reused and utilised from day one, and the ability to be used by other institutions, Coreless Banking provides these endless opportunities for financial services industries to connect, collaborate and upgrade.

The Future is Bright

It’s clear that the world is facing a digital awakening, and banks are eager to jump on board. Ensuring that the rapidly evolving consumer has everything they need in one place has never been more essential, and the time to enhance the digital experience is now.

The payments industry has continuously evolved over the last few decades and the pace of change has only increased. Technology has contributed significantly to delivering payment services to the consumer. These changes are driven by the need to increase the lending portfolio reliably with a seamless customer experience.

by Aravind Irodi, Senior Vice President, Head of Practices, Attra, a Synechron company

The recent incarnation of Buy Now Pay Later products – as available against other financial services solution such as credit cards — to a standalone solution financed by FinTechs has taken the industry by storm. This has led to a number of new players, such as Klarna and Afterpay amongst others, achieving significant growth in lending volumes. These FinTechs are lending to the new age population and taking market share away from the traditional card players on short-term credit. The FinTechs are underwriting the risk and it has shown to be a profitable initiative for the now larger players. Additionally, other well-known retail platforms (like Amazon.com and Walmart) have recognised the vast opportunity and are implementing this phenomenon for their customers.

Traditional payment service providers (a.k.a. card issuers) have an opportunity to capitalise on their existing customer relationships to provide revolving credit in a Buy Now Pay Later fashion, independent of card networks. They can use their existing accounts receivable infrastructure to provide this service with changes at the point of sale (POS) to provide the payment option and direct settlement with merchants. These payments providers possess the added advantage of having an existing customer base and credit assessment infrastructure in place under which to make credit allocation decisions. Accelerated deployment of market-ready solutions is the key to ensuring that market share is retained as FinTechs disrupt the marketplace and bigger, steadfast participants seize the opportunity.

In pursuit of superior seamless payment experiences

There are also innovations happening on the merchant side to make payment experiences seamless. A key global trend across large merchants in recent years has been to provision an omnichannel experience to its customers. This is now coming of age, with technology solution providers building out solutions to cater to this need.

Customer touch points have evolved with payment options, such as contactless cards, wallets and QR code-based payments. Each of these payment options have penetrated markets to varying degrees across the globe. Contactless payments have been mainstream in Europe and Australia for the last decade whilst playing catch-up in other markets. QR code payments have had significant acceptance in the Asia Pacific market and are now finding greater acceptance across the globe. The form factor is also evolving with the usage of wearables, such as smart watches and voice enabled payments from devices such as Alexa, finding their way into the payment ecosystem. Digital wallets, an innovation that has been in existence since the emergence of PayPal, is now gaining market share in super app ecosystems with each of the major players coming up with their own proprietary wallets. Card issuers are also moving towards a digital form factor, particularly for their prepaid cards.

In an attempt to significantly improve the shopping experience with a completely seamless payments interface, Amazon has now pioneered ‘just walk out’ technology under the brand Amazon Go. It is now offering this technology to other retailers with the market expected to evolve in the near term. These innovations are leading to the co-existence of various payment options across the globe. The hybrid ecosystem is largely due to market segmentation, not just by geography but also customer demographics and investments for large scale deployment in larger markets.

Constant ecosystem technology updates   

These continued changes in improving customer experience and making payments seamless has meant that merchants and their technology service providers must constantly keep their systems up to date. Brick-and-mortar stores have a wide variety of POS infrastructures and increasing payment options mean constant updates to this ecosystem. The online payment options are relatively easier to change. Aggregated payment gateway service providers enable a faster deployment of the latest technologies for online payment service providers.

We foresee continued evolution of payments with an increasing focus on customer comfort and making payments as seamless as possible. This would require financial services organisations to enhance their technology infrastructure in order to support these advancements and in keeping pace with market leaders. The traditional payments service providers, such as card issuers, need to have a forward-looking business team looking to launch new product options for consumers and, equally as important, is to have a technology team to enable a fast time to market.

The rapid growth of digital platforms is prevalent across the EU, where a variety of national and supranational regulators are having to pay much closer attention to the financial sector in which this new technology is being deployed.

by Manoj Mistry, Managing Director, IBOS Association

Digitalised banking networks are proliferating as traditional banking services are replaced by high levels of process automation and web-based services. Although such technological innovation in finance is not new, investment in new technologies has substantially increased in recent years and the pace of innovation is exponential.

Among the most notable areas of recent growth, there has been a significant rise in wealth management apps and digital platforms in Europe. Initially driven by younger users, who are more likely to be engaged with wealth apps, the enormous surge in interest has seen more than services for family wealth management as the profile of FinTech users gets older.

Typically, these apps are regulated by the Financial Conduct Authority (FCA) in the UK, and its counterparts in different EU member states. They use Open Banking: the sharing of financial information electronically, securely, and only under conditions to which the customers agree and approve. But inevitably, this surge in FinTech and digital platforms across the EU means that their future use will be driven as much by regulation as by technology.

In March 2018, the European Commission (EC) adopted an action plan on FinTech to ‘foster a more competitive and innovative European financial sector’. The action plan set out 19 steps that the EC intended to take to enable innovative business models to scale up at EU level, to support the uptake of new technologies such as blockchain, artificial intelligence and cloud services in the financial sector, and to increase cybersecurity and the integrity of the financial system.

This was followed by a digital finance package, which the EC adopted in September 2020. This includes a digital finance strategy, legislative proposals on crypto-assets and digital resilience, and a renewed retail payments strategy. Its overall goal is to create a competitive EU financial sector that ‘gives consumers access to innovative financial products, while ensuring consumer protection and financial stability’.

However, the digital finance strategy is only a staging post on the road to further regulation. In September 2021, the European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in EU.  Although the report outlined steps to enhance the monitoring of market developments, it stopped short of identifying any immediate need for specific legislative changes to be introduced.

But as EU regulators, such as the EBA, become far more active in identifying potential systemic risks posed to financial institutions and individual risks posed to their customers and clients, as well as to financial stability, they will have to regulate accordingly. In drafting legislation at an EU-wide level, and at a national level in each member state, consideration needs to go beyond affording consumers access and ensuring their protection, as well as maintaining financial stability. Regulators will also need to strike a careful balance between regulatory intervention and technological freedom.

In practice, this will of course necessitate creating regulations that are designed to increase transparency, mitigate risks and to guarantee sufficient protection. But while consumer protection must remain paramount, regulators must also ensure that new regulations do not frustrate or impede the pace of technological evolution.

The use of technology in financial services is highly competitive. Just as the EC’s proposed legislative initiatives to govern digital services and content in the EU, namely the Digital Services Act (DSA) and the Digital Markets Act (DMA), aim ‘to establish a level playing field to foster innovation, growth, and competitiveness, both in the European Single Market and globally’, the same must also apply in financial services regulation. The EBA must therefore ensure that new regulations do not hinder the capacity of digital platforms operating in the EU to compete effectively in global markets.

The sale of a kinetic 3-D video sculpture called HUMAN ONE earlier this month at Christie’s in New York was a milestone in the art world and not a bad day for the artist, Mike Winkelmann, better known as Beeple. The artwork sold for $29 million to a buyer in Switzerland, $14 million above the guide price.

by Adi Ben-Ari, Founder and CEO, Applied Blockchain 

What makes this piece different is that the video sculpture combines physical and digital technology. It came with an accompanying non-fungible token (NFT) representing the underlying digital assets. The artwork of an astronaut-type figure walking through an ever-changing backdrop draws on videos with an NFT on the Ethereum blockchain. The work was available for purchase using Ethereum.

The sale marks a coming of age of sorts for NFTs. To illustrate the speed at which this phenomenon has developed, even Beeple said he was unaware of NFTs a year ago. Since then, he’s sold around $100 million of digital NFT artworks – in March he sold a work entitled “Everydays: The First 5000 Days” for $69 million, the first of its kind.

NFTs are unique, digital certificates stored on a blockchain. They are a powerful tool to establish and demonstrate a type of ownership, particularly for digital assets which can be so readily copied. The non-fungible element reflects the uniqueness of each digital asset and the different values of each. Fungible assets include pounds, dollars, Bitcoin and other similar instruments that are identical and interchangeable. NFTs are generated using a “smart contract”, which is basically coding stored on a blockchain.

Digital art fuels public awareness of NFTs

What’s clear is that since NFTs entered public consciousness early in the year, they have seen a meteoric rise. Trading volume in the third quarter exceeded $10 billion, up 38,000% on the previous year. What’s more, artists, athletes and gaming developers are increasingly investing in blockchain technology to provide their audiences with unique digital assets, meaning that numerous NFT marketplaces are opening every month.

Cryptocurrencies have been around for over a decade – borne of the 2008 financial crisis – but only in the past three or four years have they started to become more mainstream. The NFT market has piggy-backed on that luring those investors who are seeking out the next new thing – the next big alternative asset class offering the potential for big returns. Blockchain is the engine for both instruments.

Blockchain records all transactions in a way that is indelible – records that are much harder to change or hack. As well, it is decentralised, meaning that control of security moves from a centralized entity, such as an individual or organisation, to a distributed network of people or entities. The technology demands transparency, accountability and puts the power into the hands of its users. That’s one of the appeals of NFTs.

One of the features of Ethereum is that it allows developers to implement so-called smart contracts. These smart contracts are essentially packets of code that may also define a digital asset and confirm that the asset as individually unique, traceable and verifiable. All NFTs have smart contracts attached to them.

Iron-clad indestructible proof of ownership

To date, NFTs have generally been linked with the art world. The value lies in the ability of the technology to prove its origin with absolute technical certainly. NFTs feature iron-clad, indestructible proof of ownership along with provenance that will last as long as the blockchain itself (forever?). In the future, every digital artwork is likely to have an associated NFT. The liquidity of an NFT certainty adds value – in the art world, that can be worth tens of millions.

An additional attraction of NFT marketplaces for artists is that they are cheaper. In the traditional art world, a gallery could easily take 30% or more of the takings on an art sale. NFT marketplaces typically charge less. This enables the artists to earn more, in particular on multiple and frequent secondary market sales, which matters because most are not as commercially successful as Beeple. NFTs also enable artists to connect directly with their customers as each purchase is documented on the blockchain and the creator is clear.

Collectors and investors are now scrambling to add such digital collectables to their portfolios, which is having a significant impact on the wider token and digital asset market. Digital collectables have driven many headlines, but the real-world application of NFT technology is even broader, extending across multiple sectors. Businesses, regulators, governments and authorities all, in different ways, stand to benefit if they are able to harness the potential of NFTs. In short, NFTs are not a fad.

So where next? The security and efficiency of smart contracts enable NFTs to be used as tickets for concerts, safeguards for digital identities or digitally tradeable representations of physical collectables and luxury items while those are in custody.

In the music industry, with the decline of physical sales and digital downloads, music artists often rely on income from streaming, which tends to reward intermediaries, such as the streaming platforms, and record labels disproportionately. NFT’s enable fans to engage directly with the artist through asset and financial transactions.

With collectable NFTs, artists gain the opportunity to establish a direct relationship with listeners and fans, enabling them to benefit financially. They also enable the payment of royalties to the original content creators – regardless of where or how the sale of NFT items occurs.

Other NFT applications are where the interest lies

One particularly valuable feature of NFTs is that they bring liquidity to previously illiquid assets. This happens through enabling ownership to change via digital platforms, especially those with global reach. Trading can be extremely efficient, requiring fewer intermediaries than traditional markets as a result of using digital guarantees. Innovative and efficient blockchain-based financing options in the form of DeFi (decentralised finance) are beginning to accept NFT’s as collateral for lending.

NFTs could also allow fractional ownership in assets such as property. This would mean property owners could unlock value from their properties and then raise funds without the assistance of multiple parties. Indeed, this approach could apply to the sale and exchange of businesses, or investments in sports star equity, whether in part or in their entirety.

Looking forward, blockchains need to become more interoperable with one another, so that an NFT minted on one blockchain is transferable to another blockchain. This is of growing importance, in a similar way that global mobile phone connectivity and then mobile app interoperability was such a big issue a few decades ago.

Applied Blockchain has built major NFT marketplaces for some of the world’s leading artists for both digital and physical art, as well as numerous other blockchain applications. NFTs offer a way to release inherent value and in doing so they create liquidity. It should be no wonder NFTs are generating such excitement across so many markets.

In today’s globalized environment, with regulatory demands and competition from FinTechs and others, institutions that cannot meet these challenges may not be viable in the long term.

by Nacho González, Blockchain Research Line Expert, Atos

Regulatory demands and competition from FinTechs, disruptors and others, especially in today’s globalized environment, are posing a long-term viability challenge to those institutions that cannot match these agile digitally focused organizations.

With the emergence of blockchain technology, a new revolution is underway: the industry is embarking on transformation, from operational processes to different business markets such as payment services, real estate, insurance, asset management, crowdfunding and lending to leverage the advantages it offers.

Blockchain is the first technology that offers a way to fully manage digital assets in a trusted, traceable, automated and predictable way. What distinguishes blockchain is that each ‘block’ is linked and secured using cryptography. Trust is distributed along the chain and relies on cryptography eliminating the need for a trusted third party to facilitate digital relationships and ledgers.

Enhancing digital finance processes

In the financial services ecosystem, the most significant business areas are clearing and settlement, trade finance, cross-border payments, insurance and anti-money laundering. This is where the Distributed Ledger Technologies (DLT) aspect of blockchain can be applied. In particular, we can point to the Australian Stock Exchange, which has since moved all of its financial asset management to a DLT platform.

Within clearing and settlement, we don’t currently have a common way forward regarding which stages of the lifecycle of a transaction (pre to post-trade, execution to settlement) can be encompassed by the blockchain. Looking at this practically, we continue to see holes such as information sharing with pre-existing legacy systems, compliance and regulatory concerns, along assets segregations. We need to address these issues before we can scale blockchain for such processes.

Yet in the financial processing industry, DLTs provide a compelling set of benefits:

• Traceability. Products and assets can be followed and scrutinized in live time. Once held in a ledger, the data is then immutable; access can be given by those who participate in the system/network, whilst preventing private information from being disseminated to any other sides. In addition, any additional asset data can be provided for use in various manners going with or going from the new owner.
• Clarity. Clear, easy to understand information regarding a transaction will help to encourage customer trust. Balancing transparency and privacy are integral features of blockchain. Identity is hidden within cryptography in the blockchain, therefore the connection of public key identities with individuals who use it is a hard connection to make. Combining this with the means of the data structure within a blockchain (in which a transaction is linked to a public key identity), allows for an unmatched level of transparency with privacy.
• Accountability. Within the chain of blocks, transactions are kept in sequence and indeterminably. This allows for accountability and auditability at every stage, not needing any outside players.
• Security. Every single transaction is verified by the network using cryptographic algorithms, assuring the authenticity and immutability of the information. The users have control over their own assets and transactions also using cryptography. Blockchain is therefore innately secure. Of course, there are theoretical scenarios where a blockchain can be counterfeit, for example modifying one single transaction in more than 51% of the network, but technical limitations make this scenario hypothetical, rather than a real threat to data integrity and immutability.
• Collaboration. DLTs enable each party to easily and securely share finance-related trade data. The level of collaboration (which information each party can share and who can access what) is determined by the configuration of the network/system, so this is a highly customizable solution easily adaptable to any regulatory, technical or functional requirement.
• Efficiency. Transactions are completed between involved parties with no intermediaries. Features like smart contracts provide automation of commercial actions, for example, cutting-edge initiatives such as Etch, an automated smart-contract based platform for wage management.

The beginning of the end of traditional banking?

Most key players in the industry have reacted to blockchain and are deploying DLT applications in their day-to-day operational processes and applying them to different services provided by institutions. These include JP Morgan Chase in the US (with its Blockchain Center of Excellence), Banco Santander in Spain (supporting initiatives such as RippleNet and Hyperledger or with We.trade trading platform deployment) or Mitsubishi UFJ in Japan (with the launch of a blockchain-based payments network).

The implementation and deployment of fully operational trusted and authorized interaction networks among corporations, B2B networks, service providers and financial institutions will be highly disruptive. This does not herald the end of the banking industry as we know it but blockchain, as part of widescale digital transformation, will add significant value. The question is whether traditional players are going to lead this transformation or new players will emerge.

A few years ago, it was fashionable to talk about ’emotional banking’, but this concept seems to have been quietly dropped. Perhaps we need to rethink the idea—the key is embedded payments and their role in ‘emotional finance’. Fintech has made the staid financial services industry infinitely more exciting, at least for those who watch the sector. But has this excitement filtered down to consumers?

By Alex Reddish, MD, Tribe Payments

People are driven by emotions, even when they don’t realise it. As consumers, gut instinct and personal preferences can play a huge part in our purchasing decisions.

The power of a brand can have far more influence on purchasing decisions than many other factors. If people feel warmly towards a brand, they are happier to engage with it. There are many reasons why Apple is one of the most successful companies in the world, but it’s undeniable that the brand is a big part of it. People see the Apple logo as a sign of quality and innovation and are happy to pay a premium for their goods. The iPod was not the first mp3 player, yet it became synonymous with the technology. Consumers (in general) love Apple. Who else could they learn to love?

Can people learn to love financial services?

A few fintech brands have made a particular effort to engage with their customers. Zopa posts regularly to Instagram with easy-to-follow, friendly advice on money matters. Business provider ANNA has developed a range of child-like illustrations and Klarna churns out a combination of zany creativity in its adverts and a steady stream of helpful tips in social media.

For all this, including the slick apps, welcoming graphic design and friendly customer service, financial service providers are still going to struggle to be as beloved as, say, Nintendo or Nike. People need to trust these providers. They need to know that they can have faith in their systems and services. Once this trust is built, can it really be developed into genuine brand affection…?

Embedded payments and the rebirth of emotional finance

Embedding payments means more convenience for customers. By making payments ultra-convenient and invisible, consumers are happier because everything happens with zero fuss or effort, and businesses get to reap the benefits. There’s also the opportunity for businesses to offer financial services that reinforce the relationship between the business and consumer, as well as delivering potential new revenue streams.

Embedded payments link merchants directly with their customers, enabling them to be part of that transaction or moment. These payments allow providers to build customer relationships at that point of need, helping build trust and develop a meaningful relationship.

But we shouldn’t see embedded payments as the endgame. It’s tempting to think that, once the payment is invisible, there is nothing more that can be done. There is the potential to create better links with customers—and perhaps even create the sort of emotional connection that other brands enjoy. This is emotional finance.

Creating better relationships is contingent on having a better understanding of the customer journey… but not the customer journey as we usually mean it. Rather than the customer’s journey through a payments system, we mean their journey through life. Priorities shift and change, and even minor decisions can mean big changes in spending. A new child, a new home, or even a new hobby can mean an abrupt shift in priorities–understanding these changing preferences and reacting to them can open the door to building better loyalty.

Right now, certain music streaming services offer deals for two people at the same address – but consumers have to proactively adopt these and link their accounts. What if a service could do this with a certain level of automation? What about other services that would be helpful to adapt without changing needs? The most common embedded payments example is paying automatically when taking an Uber or another taxi… but what about the other journeys (real and metaphorical) we take in our lives?

The key to this is, of course, data. Data means that we can create better services – more personalised, more convenient. But it’s not just about making sure we tap into the broadest range of data available. Timing is very much a factor, perhaps the most important. Instant access to data is required to make the fairest, most accurate decisions.

When we consider how much change we’ve all gone through in the last year or two, financial data that is 18 months old is likely to be very outdated, and the quality of customer data will degrade quickly over time. We need to work with the freshest data to make sure the end product is one that consumers will want.

Ultimately, consumers will pull us in the direction they want to go, no matter how much we think we can ‘push’ new products and services to them, adoption is down to the customer. Creating emotional finance – a connection through loyalty and context is key – embedding finance to make things convenient is not, on its own, enough.

The rise of innovative technologies has made it possible for challenger banks to shake up the market in the last decade. With customer needs changing and expectations increasing, there is a growing trend for smartphone banking; branchless, mobile-only banks with centralised services, ready to compete with established institutions.

by Vince Graziani, CEO, IDEX Biometrics ASA

The term challenger bank is used to describe any banking service provider looking to take on and win customers from the big corporate, or traditional banks. And now banks such as Monzo, Revolut, Chime and Papara, established in 2015, are maturing garnering praise and followers, putting established banks under increased pressure as they battle for the next generation of customers.

US-based start-up Chime is now valued at $14.5 billion and is IPO-ready. In the UK, Revolut— which has more than 14 million customers—is worth more than long-standing high street bank NatWest. Meanwhile Papara, a Turkish banking challenger has grown to eight million users, and is gearing up for European expansion in 2021, with Germany as its first growth market. Also in Europe, Swedish financial service challenger Rocker has received €48 million in equity funding just 18 months after launching. This presents some serious competition to traditional banks around the world.

 Monumental changes in consumer payment habits

Meanwhile, the pandemic has impacted the world’s financial habits. Today consumers are using less cash, making more contactless payments and want to keep a closer eye on spending patterns. As more people move their lives online, digital challengers have been well placed to take advantage of this trend.

According to Ipsos Mori’s personal banking report, challenger banks are cementing their position ahead of some of the biggest financial brands in customer service, showing that innovation and modern ideas are revolutionising the market.

For a new generation of tech-savvy customers, challenger banks also offer something a little more fashionable, with strong branding and messaging, meeting banking needs with a customer-friendly service that fits around them, not the other way round.

Can big banks catch up?

 Big banks have been playing catch up over the past few years. They were late to the game and have retroactively started backfilling their account offerings with spending trackers and notifications. But chasing the features of more agile, mobile-focused competitors isn’t enough to help them thrive in a changing banking world.

In particular, these challengers gain competitive advantage by creating new payment options that reflect customer demand for additional security and convenience. As studies show that payment cards will dominate the banking scene for at least the next decade, bank players need to revolutionise their own payment card offerings to respond to consumer needs.

New and emerging payment options

With consumers concerned about security, convenience and speedy payment options in an increasingly cashless world, big banks must embrace new biometric technology if they are to win their business.

A smart fingerprint authentication payment card already far exceeds the security of PIN authentication. This new generation of on-card fingerprint recognition technology has shown to be more than twice as secure[1] as traditional card payment transactions requiring a four-digit PIN.

Fingerprint data is held securely on the card, not in a shared database, meaning personal biometric data never leaves the card and cannot be hacked, recreated or breached. By linking the user to their card via the unique properties of their fingerprint, banks and retailers can create a payment process that is safe, speedy and highly secure –while demonstrating innovative thinking and future proofing themselves.

Fingerprint authentication is also more inclusive. It removes barriers for those with literacy challenges or memory difficulties because biometric payment cards simply allow consumers to be their own authentication. They can be used in any corner of the world, even in the most remote locations with limited cloud connection.

Biometric cards can also be used to provide direct and unequivocal identification to help the financially excluded open bank accounts and improve their credit scores.

Why embracing new biometric innovation can help gain top-of-wallet status

With the economy slowly bouncing back to pre-Covid levels, fingerprint biometric payment cards offer a safe, secure, hygienic method of payment authentication, providing an additional layer of security and trust in a cashless world. The rising wave of fintech’s and challenger banks is forcing traditional banks to focus on product and service differentiation as they try to compete against more agile entities and retain brand loyalty. Therefore, it’s important now more than ever for banks to embrace new biometric technology to provide their customers with an enhanced customer experience and deliver essential security to their payments.

Biometric payment cards enable challengers as well as incumbents to compete for and gain top-of-wallet status, protect users from fraud and build trust with the consumers of tomorrow. With technology evolving at lightning speed, now is the time for the banking sector to embrace cutting edge innovation and win the fintech play.

[1] Independent field trials commissioned by IDEX Biometrics in 2021 demonstrate the likelihood that a fingerprint biometric payment card incorrectly accepts an unauthorized user was less than one in 20,000, compared to a one in 10,000 chance of correctly guessing a user’s four-digit PIN.