The Impact of Digital Transformation on Banking & Financial Services

2020 has been a year like no other for the banking and financial sectors. Whilst the Covid-19 pandemic has challenged all industries, finance and banking are at the center of this transforming experience: The ‘Work From Home’ (WFH) movement forced changes in working practices. And new digital service requirements, such as fast access to government-backed financial help, have become urgent. But even before this, those in the financial sector worked diligently to create positive change for customers through digital transformation.

Digital transformation in the banking and financial sector space is a massive undertaking. As consumer-facing services, these entities have to meet emerging consumer expectations, market democratization, and highly sophisticated client requirements. This is then complicated by the need to adhere to stringent regulatory compliance around anti-money laundering, data protection laws, BSA, and others.

The use of insight-driven digital transformation is crucial to maintaining a competitive edge, but it can also bring challenges. This is no truer than in the complex area of financial services and banking regulatory compliance.

The Digital Touchpoints of Financial Services Transformation: The New Frontier

Analyst, Forrester, expects that by 2030, “Banking will be invisible, connected, insights-driven, and purposeful” and the industry must be built on ‘trust’.

Forrester identifies two key drivers of digital transformation: Improvements in customer experience (CX) and revenue growth opportunities. This is all within the backdrop of the challenger banks who have led the way in innovative CX whilst adding layers of competition into the space.

Also, new service requirements have fallen out of the Covid-19 situation. One of these is the requirement for banks to take a central role in providing digital channels of access to SMBs looking for government-backed loans. Another is the movement towards more complicated financial networks, which can be taken advantage of by cybercriminals. The sheer volume of financial transactions complicating the arena even further.

The industry is truly at the edge of a new frontier, driven by world events and tackled by digital transformation. To push through boundaries, banking leaders are investing heavily in making processes digitized, but safe.

Many banking leaders are already some way down the digital transformation path using smart technologies such as robotic process automation (RPA), machine learning for anti-money laundering (AML), and know-your-customer (KYC), as well as RegTech to mitigate compliance risks.

As the digital footprint of the financial industry strides into new pastures, how does this fit with the other side of the digital coin? Cybercrime is ever-present and regulatory restrictions mean financial entities must adhere or face large fines and reputational damage.

Covid-19, Cybercrime, and Regulations at the Intersection of Digital Transformation

Digital transformation crosses at an intersection with a number of counter-aligning pieces of a complex puzzle. If this were to be drawn up as a Venn diagram, the Covid-19 impact, cybercrime increases, and regulations, would all feature, the center of the diagram focusing on the types of balancing measures needed to optimize the landscape.

Cybercrime and Covid-19

Several industry bodies have published notifications on the increased risk of money laundering during the Covid-19 pandemic. The FATF stated earlier this year that “Criminals are taking advantage of the COVID-19 pandemic to carry out financial fraud and exploitation scams”, the organization stressing that “criminals and terrorists may seek to exploit gaps and weaknesses in national anti-money laundering/counter-financing of terrorism (AML/CFT) systems while they assume resources are focused elsewhere

The regulatory burden and digital transformation

Regulation has to deal with the ever-changing IT environment that digital transformation reflects. New and updated legislation tries to tackle this with new measures; PSD2 is an example of an attempt to batten down the authentication hatches as new methods of online payment become the ‘new normal’. Regulations such as 5AMLD and the NYSDFS Part 504 (final rule) suggest technological approaches to meeting regulations. This includes artificial intelligence (AI) and machine learning (ML) to deal with the risk management of digital transactions.

The streamlining of key processes required for compliance can give a bank or financial service the best of both worlds. Take anti-money-laundering (AML) checks as an example. AML legislation has to offer ways of dealing with the increasing amounts of cybercrime. Cybercriminals are feasting off the large volumes of payment transactions, payment revenues expected to surpass $2.7 trillion by 2023. An Eastnets survey found that 4 out of 5 banks are targeted by SWIFT payment messaging fraud, for example. Behind this alignment of financial planets, is the digital transformation of AML checks.

Client onboarding and AML checks are a positive focus area for digital transformation. Smart AML services, such as en.SafeTrade, provide a digital platform to prevent trade-based money laundering that complies with regulation. The approach to AML and other financial checks must be effective within the context of new digital processes that have created vastly more complicated systems. This means that traditional systems may no longer be fit for purpose.

The issues that digital transformation can create

When making disruptive changes to key processes, issues arise. Digital transformation is a 360-degree affair. If a change is made in one area, another area is affected. This is seen acutely in the payment processing area. Digital payments have created a more fluid and seamless CX. The areas that require attention during digital transformation include the backend systems, those that shore up cybersecurity, anti-fraud, and regulatory compliance:

Legacy tech is not fit for purpose

Older platforms that provide anti-fraud and AML checks are not of the level of sophistication required for modern digital transactions. Their ability to identify and act upon risk is limited. These legacy systems, like their front-end counterparts, must be transformed by using smarter technologies, including those based on AI and ML. These smart methods can apply learning-based rules that evolve with changing threats. These systems are much more closely suited to this new era of payments and financial transactions.

Fraud detection issues

Fraud is rarely a sudden individual movement of a large amount of money. More typical is a web of interconnected individuals, companies, trades, and so on used to make multiple money interchanges. Connected devices are part of this bigger picture too. A recent case shows the complex nature of modern fraud. The fraud, ongoing since 2013, involved 28 North Korean and 5 Chinese bankers who were behind at least $2.5 billion in illegal payments, routed through U.S. correspondent banks and 250 front companies. Traditional tools that attempt to detect fraud of this nature cannot make the connections needed across such a complicated matrix. And so, fraudulent activity goes undetected for years.

The scourge of false positives

Within the environment of more complex anti-fraud, the need to maintain a great customer experience (CX) persists. Older sanction screening and AML mechanisms have a problem in creating false positives that impact on the CX. This is borne out in a report from Microsoft researching traditional Transaction Monitoring Systems (TMS) that found up to 90% false positive rates. There is a fine balance between meeting the requirements of sanction screening and AML regulations and ensuring customers have a great experience. How to meet this compliance and retain a competitive CX by keeping false positives to a minimum, requires digital transformation to occur in the backend as well as the front. Machine learning based AML checking platforms consistently reduce false positives.

For every action, there must be an equal and opposite reaction

Digital transformation happens across a wide-angle lens in the banking and financial services world. As new technology comes on board to improve the customer experience, an equivalent back-end protective layer must be applied to counterbalance any doors opened with new technological approaches. By digitizing payments, making them seamless and fast, new opportunities for cybercrime has appeared. Cybercriminals take advantage of any potential door. For example, Trade-based money laundering (TBML) is a system based on massive volumes of traffic. The US Government Accountability Office (GAO) recently warned that cybercriminals are turning to TBML as a way of hiding fraudulent payments, using international funds transfers to wire money across borders. This is evidenced out by figures such as $10 billion in fines in a 15-month period to 2019 with 60.5% associated with AML violations. When applying technology to create a better customer experience and innovate to build new revenue opportunities, banking and finance must also digitally transform the backend that facilitates these changes. By applying a 360-degree-approach to digital transformation, the industry can ensure that innovation is well-rounded and meets regulations as well as customer expectations.


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