Commentaries and insightful analyses on the world of finance, technology and IT.

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December 29, 2016

Challenger banks challenging the status quo!

- By Kiran Kalmadi and Durga Prasad Balmuri

Atom, B, Fidor, Tandem, Monzo, Masthaven, Soldo, Zopa - well, these aren't new elements added to the periodic table, but are new-age challenger banks, challenging the status quo of the banking industry. For those who were expecting us to tell the name of the new elements that have been added to the periodic table, we have a surprise in store for you towards the end of this blog. For now, we are focusing on the challenger banks. Most of the challenger banks came into existence post 2008 crisis, and they have surged with accelerated pace after 2013. While some challenger banks like Masthaven Bank, Starling Bank, and Monzo Bank have got their banking licenses, others like Redbook Bank, CivilisedBank, and Lintel Bank are still waiting for their turn.

Challenger banks have mushroomed, thanks to lack of customer confidence in traditional banks, increasing smartphone penetration, and high expectations from the millennial population. Adding to this, the regulatory impetus provided by regulators of many countries who have come out with policies that are positive for starting of challenger banks and other fintech companies with measures, such as:
a) Creation of a regulatory sandbox by Financial Conduct Authority (FCA) in UK. These sandboxes, set as part of project innovate by the FCA, allowed new offerings or services to be tested out in environments, which are immune from standard regulatory restrictions
b) Formation of innovation hubs, for example, Australian regulator Australian Prudential Regulation Authority (APRA) set up innovation hub to assist fintech companies
c) Issuance of a whitepaper on supporting reasonable financial innovation through fintech in the US by the Office of the Comptroller of the Currency (OCC)
d) Starting of fintech accelerator programs

Before the emergence of challenger banks, there certainly was a vacuum between what customers really wanted and what was being offered in various areas of banking services. Millennials, who were comfortable with the Facebook, Google, and Amazon's of the world started expecting similar customer service, user-experience, and convenience in their day to day handling of finances. Challenger banks with their light-asset model, lack of legacy hang-over, and a focus on cutting-edge technology have emerged as a whiff of fresh air in the banking arena with this business model. These banks, being largely digital, are breathing down the necks of traditional financial service providers by providing innovative, efficient, and personalized range of banking services.

Features like mobile only, biometric logins, free checking account, opening accounts in few minutes, getting loans in minutes, spend analytics, 24x7 customer service, quick money transfer, peer-to-peer (P2P) lending, real-time balance checks, gamified experience, and few others are attracting customers to challenger banks. These banks with simple business models enjoy cost and operational advantages, which allow them to provide services at better rates compared to traditional banks.

Challenger banks too have their own challenges and the going will get tough in the years ahead. Challenges like stricter regulatory norms, acquiring new customers, and customer retention is bound to test out these new generation banks. However, a much bigger threat to encounter will be when the traditional banks with their financial clout revisit their business models and start focusing on niche banking areas.

With competition sure to race up among challenger banks and with more challenge from traditional banks, more activity is expected in 2017. Keep watching this space!!

For the chemistry enthusiasts out there, the International Union of Pure and Applied Chemistry officially approved the name and symbols for four elements: Nihonium, Moscovium, Tennessine, and Oganesson to the periodic table of elements.

December 27, 2016

Behavioral analytics: A logical perspective of customer behavior

My phone beeped and a personalized message from my bank appeared: "Dear XXXX, new investment option factoring your income, age, and investment preferences awaits you." Initially, I thought it was just a promotional message, but then I realized it was more than that. Living in an era of analytics where every bit of data can be analyzed, I sensed it could be the advent of the new phenomenon -- behavioral analytics!

As the terminology signifies, behavioral analytics is about analyzing the behavioral patterns of customers. To elaborate, it is to be aware of customers' expectations and their manners. With the right set of behavioral information, one can derive conclusions on their requirements and possible actions in certain scenarios. This branch of analytics is widely used across industries including retail, e-commerce, communication, and the list goes on. Of late, even the financial services such as banking sectors have started embracing the new analytical approach.

The banking arena is becoming competitive day by day and hence, it is very important for the banks to devise the best marketing strategies to win customers. Keeping that in mind, banks have started leveraging behavioral analytics to trace their customers' transactions, preferred banking channel, i.e., online or mobile, and analyze their interactions with processes and different banking channels. Additionally, with the help of behavioral analytics, banks can easily track whether customers are navigating the online site / mobile app, in the same way or whether each customer differs in usage patterns. It helps banks to create a solid database to analyze customer behavioral pattern. This detailed analysis helps banks to draw a clear picture of their customers' requirement. It indeed helps them to better engage with their customers and use the analysis for positioning the products well at the right time through a proper banking channel.
As the customer base grows, the banks will also get loads of data. If banks fail to manage the data efficiently and effectively, they become vulnerable to fraudsters. The banks across the globe are in news for the alarming rise of frauds and malpractices and the fines / penalties associated with it. If customers feel their data isn't secure with banks, they would prefer switching their banks. Hence, the banks are using the new concept of behavioral analytics as a significant detection tool to combat frauds. It tracks the behavior of every customer and if the bank finds any change in transaction pattern such as frequent entering of passwords, editing of profile details, and unexpected increase in transactions or high value based transactions. It signals to banks on the possible case of malicious or fraudulent transactions. Then the banks can proactively alert customers and also take extra efforts to ensure data security. As behavioral analytics dives deep into the account holder's information, it ensures better security of data than the traditional monitoring tools, which are more vulnerable to frauds.

In a nutshell, behavioral analytics seems to be a win-win case for both banks and their customers. From customers' perspective, getting personalized solutions that suit their needs strengthen their confidence in banks. On the other hand, for the banks along with the benefits of effective customer engagement, behavioral analytics helps them to combat fraud which will prevent paying penalties for malpractices and fraudulent activities.

Michael Voegele, Chief Information Officer (CIO) of Adidas said, "Data is the fuel and analytics is engine at Adidas." I too feel that data and analytics would decide the future of all industries, especially banking which is becoming increasingly digital. It's time for banks to jump into the soaring wave of analytics, especially behavioral analytics, which has immense potential to analyze data and deliver customized solutions that in turn would help banks fulfill their motto - anything and everything for customers!

December 26, 2016

Starting a new chapter with behavioral biometrics

It is natural to be worried when your competitor gets robbed of US$3 million dollars from nine thousand customers. This worry brings forth the need to prepare against such attacks. Of course, I am referring to the recent cyber theft at Tesco Bank in Scotland. Tesco Bank's competitor Natwest Bank is putting its faith in behavioral biometrics to deal with such attacks. NatWest is not alone in doing so. Many other banks have also been enamored with behavioral biometrics and are trying to make it a part of their digital defense mechanism.

Though both physical and behavioral biometrics are related to humans, there is a difference between the two. Physical biometrics involves innate human characteristics such as fingerprints, retina, etc.; whereas behavioral biometrics involves identifying, collecting, and analyzing the measurable pattern of human activities. In banking, it would translate into measuring and analyzing how one is holding one's mobile, the rhythm of one's keyboard strokes, typographical errors, etc. Through the analysis of such data, an outline and description of each customer is made and used each time the customer is using digital banking services. This helps in minimizing false positives and making authentication more effective.

The advantage that behavioral biometrics has over physical biometrics is that it needs just one-time verification, whereas physical biometrics needs continuous verification through ceaseless analysis of customer behavior.

It is still not a perfect solution. Issues such as lack of accuracy, which is said to be around 80 percent, is a problem along with the lack of analytical capabilities. There are also challenges in identifying the behavior of a person accurately when he/she is in distress due to a physical accident, or inebriated. Difficulties are huge, but so are the opportunities. That is why, US-based NOW Money, Israel-based Leumi Card, IT players like IBM, and many others are working on increasing the accuracy of this technology, which would make it more usable and secure to use.

In conclusion, behavior biometrics may not be a silver bullet, but it is still an important weapon to combat the incessant struggle for cyber security. Advancements in technology could make this the next big thing, not only for identification but also for understanding customers. 

December 16, 2016

Combatting Bank Frauds

- By Prasanna Sekar and Maruvarkuzhali Subramanian

It is almost the end of another eventful year. Banks are battling myriad regulatory uncertainties, technology twists, and unconventional competition, while fraudsters are raising their game relentlessly. By 2020, industry experts are pegging online banking fraud to grow by 27 percent approximately. Not surprisingly, major fraud detection and prevention (FDP) players are screaming from their rooftops warning about omnichannel vulnerabilities and the need to raise the bar.

Card-not-present fraud is almost like a new normal -- be it the bank heist at Bangladesh's central bank or 3.2 million debit cards getting compromised in the Indian subcontinent. In the west, Tesco Bank as well as banks across the Atlantic have been victims of cyber theft, too.
Reactive forensic audits by banks are inevitable, but few banks have taken cues from their peers' wounds. For instance, the US Bank offers Visa's geolocation service that matches card and mobile phone locations. The nascent behavioral biometric technology used by National Westminster Bank in London tracks every customer movement (website / mobile app) to spot anomalies. And NatWest (RBS), currently employing physical biometrics, has deployed BioCatch's behavioral biometric software to provide 'nonstop authentication.'

Thus, there are various technologies that banks can adopt to detect and prevent fraudulent transactions. There are technologies like the RSA security which can look for various threats like spoofed websites, phishing, and apply that in a database that the clients/customers use which is used as a basis for creating an authentication system. In tandem, the banks keep a check on false red flags.

The digital revolution is making lives easier for banks and customers, but as there are always two sides of a coin, it opens doors for cyber-attacks and fraudulent transactions (e-commerce payment, ATM fraud, etc.). Most banks continually research on possible foolproof systems, unafraid to invest in risk management. They are precautious while trying to safeguard the privacy of their customers and continuously come up with new technology like artificial intelligence, machine learning, multi-factor authentication, biometrics, popular Europay, MasterCard, and Visa chips, and more. Yet, there is a tremendous scope for improvement, as technology is evolving, after all.

Fraudulent transactions are getting innovative by the day, forcing banks to think beyond traditional security measures. The increase in successful adoption of mobile voice recognition technology in the financial services industry is proof enough for further uptake among banks. Various advanced identification systems analyze the way each individual sounds, verifies other markers like accent, pronunciation etc. and can even distinguish if the customer is suffering from a cold. It is very difficult to emulate / mimic and beat a human voice.

Apart from tech spend, banks need to educate their customers on aspects like debit / credit card theft, hotlisting, identity theft, and such. For instance, customers can minimize ATM fraud exposure simply by using own bank's ATM and avoiding ATM PIN disclosure. Similarly, in the absence of wireless point of sale (POS), customers ought to refrain from PIN disclosure to dodge a walk to the bill / cheque counter. Also, it is high time the single universal password or the PIN is forgone.

There is no safe place on earth. IT countermeasures cannot succeed on its own, as real change necessitates a drastic shift in the customer mindset too, making them equally liable. In the dynamic digital age, banks need to innovate to stay one step ahead of the fraudsters and provide a safe environment to transact. In the future, an impenetrable cyber banking infrastructure will be a key differentiator.

Engaging Millennials -- The New Cash Cows of Banks

- By Chetna Narayanan and Siddhartha Chanda

Millennials seem to be the blue-eyed audience across industries, and they are turning out to be the most prominent influencers as they are disrupting everything from technology to cultural ideologies. They live on the edges of digital touchpoints and are expected to become the world's largest living generation in a year or two. We feel this 'selfie' generation is going to be the greatest disruptor of the banking industry, in terms of how products / services are delivered and how it is being communicated.

As digital natives, millennials are generally not drawn towards traditional banking models. Rather, they prefer to keep banks at arm's length and be more transaction-driven than relationship-driven. This demographic segment is prone to clicks and swipes, mobile dependencies, and are saying 'no' to calls and meetings. Recent statistics suggest, four in ten millennials are customers of non-traditional banking providers for some their financial needs like check cashing, money transfers, orders, and such. Moreover, according to an Ipsos and Linkedin survey, millennials are more likely to believe that banks will not be their primary financial institution in the future. This is really worrying for traditional banks, as it is estimated that this particular group is controlling approximately more than a trillion of liquid assets, and it is expected to get tripled by 2020. Moreover, they will also be benefitting from the inherited wealth of their baby boomer parents, which will make this segment even more lucrative for banks.

So, what can the leading financial institutions do to build effective relationships with these probable cash cows? We can think of three aspects. In one of the surveys done by a leading consulting house, it was pointed out that being financially secure is the most important goal of the millennials and they detest uncertainty. The millennials argue that since banks know a lot about their finances and spending patterns, banks should advise them on how to reach their financial goals and act as their financial caretaker  instead of just selling them products. On this front, investing in a personalized, intuitive financial management tool would definitely help this group make better decisions about their finances. That said, it does not mean that the tool would just aggregate the data and throw information at the customers, waiting for any action to be taken by them. Rather, the approach has to be more personalized so that it reduces the users' effort to take any action. For example, it can include pro-active budget planning and, for that matter, a warning pop-up saying that the user can disrupt the monthly budget if a particular transaction is made.

Banks can take a cue from how the FinTechs are focusing on this area and come up with innovative solutions. As an illustration, Personetics uses predictive analytics to provide real-time personalized guidance on the users' finances. Simple, an automated budget and savings app, informs customers about future bills, pending transactions, and details of regular transactions, in advance, so that the customer knows exactly how much to spend from the existing balance. Qapital, a personal finance mobile application firm, makes saving fun by rewarding users every time they reached a goal.

Secondly, banks can look at usability. Millennials are looking for seamless user experience with the same look and feel from one device to another. App usability rating is one of the key factors for selecting a bank. Again, looking at how FinTechs have innovated themselves here - Klarna, a Swedish e-commerce company, provides a very smooth payment option for users by requiring only the email ID and ZIP code with the 'pay later' option, which helps customers to pay at their own convenience.

The third aspect is communication.  Millennials expect zero delays in communication, whether it is a friend or a corporation they are entrusted with. Hence, banks need to carefully study their digital and behavioral preferences and communicate through the right channel at the right time. Banks should also keep the content relevant and personalized so that the millennials get a sense of being involved and informed and not just a subject being marketed to.

So, what does this mean for the banks? All the aspects that we have discussed above definitely talk about being digital, but that is not restricted to only this group. More than that, what banks need to do right now is redefine the relationship they currently have with customers. They have to strike a fine chord between offering a personalized banking and improve their reputation with digital offerings at the same time.

December 5, 2016

Cloud banking: Slowly but steadily

- By Chetna Narayanan and Prasanna Sekar

The whole world is moving toward cloud technology, but many banks are yet to decide about owning a space on cloud though they are moving at a slow pace in this direction. Although they understand the benefits of cost efficiency and agility that cloud technology offers, banks are yet to create a mandate on what data and services can be shared and comprehend pre-conditions as some data is too sensitive, critical, or regulated to be placed on cloud.

Initially, banks had been highly conventional about the adoption of cloud technology due to the nature of business and sensitivity of the data they deal with. This is why they are validating one application at a time on cloud while still holding on to core banking software and keenly observing how cloud impacts security and infrastructure. In the last few years, Banks have witnessed the pressure   to consolidate IT costs. Most of the chief information officers (CIOs) clearly stated that cost and regulatory compliance are the top most priorities for them and they are convinced that cloud will reduce their capital expenditures.

Today, cloud vendors are trying to create service offerings that encompass compliance, flexibility, and security features like end-to-end encryption that are encouraging financial institutions to explore cloud technology. Moreover, regulators too have started to show interest in addressing legal and compliance issues in cloud migration. However, the adoption of cloud among banks varies from regional to international level in terms of cloud models. We are yet to see consistency in cloud adoption across banks.

More importantly, banks need to make smart decisions while adopting the right model for their business based on their needs / challenges. This could be software as a service (SaaS), platform as a service (PaaS), or any other model. There are various advantages of shifting to cloud like operational convenience, competitive edge, less energy consumption, and customer retention. As public cloud gains momentum, even financial institutions are exploring that as an option, though many refrained from talking about it. Global financial institutions or banks like JPMC, Capital One, and DBS have recently started using applications in Amazon Web Services (AWS). Bankinter (Spanish bank) uses the Amazon cloud to run credit risk simulations. The manner in which banks are cashing on public cloud services shows companies like Microsoft and AWS are trying to help banks with appropriate agile business models to outweigh benefits over risks.

Regulatory authorities are also gradually participating in building efficient cloud infrastructure for banks. Finance Conduct Authority (FCA) has given a green signal to use cloud computing in UK financial services by executing guidelines with regard to 'choice and control' in data storage, process and management, and enabling 'effective access'. Gramm-Leach-Bliley Act (GLBA) of US also urged financial services firms to protect the privacy of 'non-public personal information' by enacting a variety of personnel and computer security policies. This provides an opportunity for banks to utilize cloud computing. Various reports suggest increased adoption or investments in cloud in the future. The approach for banks should be gradual and not an all-at-once approach as it may lead to various challenges, mainly security issues. Once the data in a bank is compromised, it would be difficult to gain the trust of customers, which is very critical for decisions while adopting cloud computing.

The days are not far when regulators, banks, and cloud vendors will create a better cloud ecosystem for banks where security and regulatory norms will have high priority. However, all three of them have already started their journey toward secure and cost-effective banking.