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

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March 31, 2017

Real opportunities in artificial intelligence

- By Kuljit Singh and Saurabh Jain

One of the most interesting parts of our fun-filled annual get-together was the gems of wisdom imparted by our senior management. Most emphasis was laid on how the financial services industry is captivated by artificial intelligence (AI). It was stated categorically that AI is and will remain at the top of our agenda for some time to come.

My earliest memory of robots with intelligence, and in this case with lots of muscle, is that of the movie, Terminator's part one. It is fascinating to understand that what was shown as fiction in the movie, in terms of the Terminator gathering myriad data and processing it to take its decision in real time, has now become a reality and fad.

Financial services firms are using AI in the forms of real-times analytics, predictive analytics, machine learning, deep learning, image and video analytics, graph analytics, bots, RPA, and more to improve their understanding of customers and also to improve their services and processes. If we look around, AI is becoming ubiquitous and is touching all domains and functions within financial services, like, fraud analytics in consumer banking, real-time analytics in corporate banking for loan approvals, real-time analytics in capital markets for monitoring trade, etc. Similarly, biometrics is used in consumer and corporate banking for identification, in capital markets for identifying trading patterns, and more.

One of the recent examples which gave us inklings of banking interests in AI is Santander's announcement that it would be using voice recognition via its mobile app to provide secured transactions. RBS bank's AI customer service assistant, Luvo, which interacts with its staff, is on trial. RBS plans on using it to serve customers in the future. Swedbank's Nina, a web assistant, and many such banks are already using or are in the process of using AI for various aspects of banking.

The focus is now moving from basic robots to humanoid robots with human emotions, like Pepper, the robot developed by Softbank, which is powered by IBM Watson. Mizuho Financial Group started using Pepper to address customer inquiries in 2015 itself. Not to be left behind, Mitsubishi UFJ Financial has also trialed a humanoid robot named Nao.

With such sharp focus and widespread acceptance of AI, it is imperative for technology companies to up their games to be able to service the demands of financial services clients. As AI moves deeper into the organizations, the opportunity is getting bigger for vendors to help select, deploy, and maintain this new AI ecosystem.

As in Terminator, where the famous antagonist spoke in an impersonal and robotic voice with no human touch, the same malady also ails the current robots. And to find the cure to these and other issues is going to present challenges and opportunities, which would keep banks as well as vendors busy for some time to come.

March 28, 2017

Is 2017 the year of regtechs?

- By Naveen PV and Varun Narang

Regulation was just a word before 2008, then it became 'the word' and for financial services -- the world. The subprime crisis of 2008 led to an over-regulated environment in financial services. The likes of Volcker, Dodd-Frank, and stress tests became buzz words, and millions of dollars were spent on ensuring compliance with the regulations.

Since the financial crisis, major US banks spent billions of dollars on compliance and added substantial strengths to their compliance departments. Financial institutions (FIs) began capturing, storing, and analyzing more data in-house, data reporting saw a substantial uptick, and new approaches to handle risk were introduced. 

At this juncture, the intervention of technology became really critical to handle the massive growth of reporting requirements. This subsequently led to the marriage of regulation and technology, leading to regtech (regulatory technology). Regtech came to the help of the financial services industry by automating compliance tasks and reducing the operational risks associated with meeting compliance requirements.

The effect of regtech on regulations is almost as extraordinary as fintech's impact on banks. It addresses risk and compliance obligations in a very cost-effective way by using algorithms and analytics to generate real-time information. Regtech also triggers innovation in the compliance space by identifying and adopting emerging technologies which have the potential to help firms manage regulatory compliance in an efficient way.

Few areas where regtech is affecting substantial change are anti-fraud measures, anti-money laundering (AML), Know Your Customer, regulatory reporting tools, compliance analytics, and such. For example, AML checks can now be streamlined using new approaches, social media and biometrics can be used effortlessly for customer due diligence, and producing a suspicious activity report can be a click away for banks.

Few interesting regtech companies are: Suade, a technology consultant for regulatory concerns; AlgoDynamix, a risk analytics company that detects disruptive events; Silverfinch, a data distribution hub that connects asset managers and insurers through a fund data utility; Corlytics, a provider of compliance risk analysis for financial institutions; Trulioo, an identity verification company; IdentityMind Global, an on-demand platform providing risk management and anti-fraud services; and such. A few governments are also making efforts to promote regtechs. Britain's Financial Conduct Authority provides clarifications on the compliance steps to follow and has also partnered with various FIs, academics, and accelerator platforms. Regtech companies are making complex work simple, making firms more flexible, and helping them reduce the regulatory costs.

2017 was tipped to be a great year for regtechs. However, the sector may face some issues due to the proposed policies of the new US president, which is targeted at de-regulation of the financial sector. The decrease in the number of regulations and their complexities would impact the prospects of regtechs, at least for some of the late entrants into the game. Regtechs have been focusing on digitization and automation of manual reporting and compliance processes during most of its existence. But looking at the imminent changes which may occur in the US regulatory world, to stay relevant, regtechs should broaden their scope of activities and move towards helping the financial services segment to monitor and enforce compliance with the regulations in near real-time. Nevertheless, regtechs will continue to have a profound influence on how banks and financial services firms comply with regulations in the future.

March 27, 2017

Transforming financial services using IoT

The divide between the physical and digital world is thinning as if these worlds are merging into one. As per Gartner, by the end of this year, there will be ~8.4 billion connected things (commonly referred to as Internet of Things or IoT) in the world, recording, and processing data continuously. To put this large number into perspective, as per McKinsey, IoT may generate US$11 trillion in economic activity by 2025 and has the potential to change the world as we know it.

As the name suggests, Internet of Things is the interconnection of computing devices embedded in things and is mostly associated with the engineering or manufacturing sector like building connected cars or safer aircrafts.
IoT has the potential to transform intangible services like financial services, though indirectly, using tangible things.

The most obvious benefit which comes immediately to mind is the availability of better and more data regarding users' assets. The other benefits are improved customer experience and operational performance, effective product / stock pricing, development of usage-based insurance, effective underwriting, etc.

IoT can be used in all the sub-sectors of financial services like insurance, customer relationship management (CRM), data management, investments, banking, and such. Auto insurers have started installing IoT devices in customers' cars, which help to choose better policies and effective premium rates. Investment bankers can invest in easily measurable things like weather, therefore pricing derivatives better.

High-frequency traders can invest their money a few seconds before the rest. Retail banks can get actionable insights from home appliances data and provide timely credit to customers. Business banking can provide less risky loans to SMEs by predicting how many appliances will need maintenance.

Recently, IBM established global office for its 'Watson IoT' business, having ~6000 associates and clients world-wide. Japanese bank, Mizuho, has started research and development (R&D) on the creation of a platform for secure payments using IoT devices such as smart home kits, connected cars, and wearables. Australia's Commonwealth Bank, experimented with an inter-bank trade transaction combining Internet of Things with blockchain. BNP Paribas' German digital arm, Consorsbank, has formed a team to develop new financial services such as investment advice using IoT. A European bank is piloting on a 'healthy savings account.' The bank will track customers' fitness levels through a wearable device and offer higher rates to those who burn more calories.

Insurers and bankers are already waking up to this massive opportunity and sensitizing their employees to modify and align their offerings with smart devices. From an IT vendor's perspective, they can start by forming a separate team focused on IoT. They can also start tying up with industrial consortiums, academia, and IoT platforms like Amazon, GE, Microsoft, and such to be prepared to surf this game-changing tide.

March 16, 2017

Disruption wave in trade and supply chain finance

Couple of years back, Anand and I were discussing few digital disruptions in the financial world that have made a phenomenal impact on the banking sector. We have alternate payment channels that challenge the traditional brick and mortars - immediate payment services (IMPS) transactions, renewed contextual mashups, dashboards, to name a few. Then he threw a question at me - Is there any such disruption happening in the trade and supply chain finance world? Can we eliminate / diminish the monopoly of SWIFT by providing an alternate, safe, secure, cost-effective, and transparent channel? Trade finance is infamous for its process inefficiencies and notorious for cost escalation. Also, not that charming while comparing with retail banking segments. I could not read his mind clearly to derive a conclusion but he knew exactly what he was talking about. Now, two years later, the world is talking about that disruption. Most of the Ivy League banks have either partnered with a consortium to develop this channel or developing in-house model.

The players involved are so excited about this innovation, and what more, SWIFT has predictably sensed the danger of their existence, hence started developing a prototype to make it exclusive for them.

You would have guessed it already, it is none other than blockchain technology. The history of distributed ledger evolved from 90s, however the distinct development has begun from 2008-09 onwards when the ever mysterious Satoshi Nakamoto presented the bitcoin idea based on distributed ledger theory. The world has seen a systematic evolvement of blockchain technology after that, and banks are now keen to add more use cases to improve their operational efficiency. A recent survey done by distributed ledger professionals revealed that majority of banks do not want to miss this blockchain disruption, even if it may challenge some of their successful business models.

Blockchain provides a transparent framework for all relevant parties to communicate transparently. The documents are stored arithmetically to make it available for all. Matching and approvals can be automated unless for exceptions. This makes the whole process significantly faster and secure.
Blockchain driven Trade Finance  use cases, any example?

What is disruptive in this? Just an advanced mode of transmission, isn't it?
That is quite interesting to be justified! Let us understand more, what is fascinating beyond cost optimization and speed factors:

1. Significant change in current business model - Risk-free deals provide better negotiation power to both importers and exporters. Predictability of funds, document management, and shipping are significantly improved. Option of discounting, bills rediscounting, purchases, etc., can be relooked
2. New business models may emerge - Even a technology company (let's say fintech here) can facilitate entire trade transactions since the process is much simplified but digital driven (already modeled this in payment segment and now they can expand their business line). Banks really have to wonder, who moved their cheese!
3. Moving in parallel with retail transactions due to its near real-time behavior - This excitement will definitely bring in more incremental disruptions in the  future
4. The sheer change in technology may force some of the talent to be redundant - Take for instance, we can avoid the expertise in message type (MT) format as the process is now much simplified across the life cycle. A renewed talent philosophy may emerge amidst the chaos!
5.Advance analytics - It can play a vital role in defining the predictability and pitfalls by analyzing the transaction pattern. Isn't that quite exciting?

Are we ready to be part of this positive disruption?
1.The existing business use cases should be simplified to leverage the advantages that blockchain offers. E.g., an average life cycle of a typical trade transaction may take around 20 - 25 days to complete, whereas a distributed ledger network will help the trade to complete in few hours, potentially.
2.Banking Industry Architecture Network (BIAN) standards should be in place to strengthen process inclusion and innovation. We cannot wait for another three decades to have the next set of disruption! Let the experts across the globe participate in this refreshing change management process. It is the era of open source, the best will survive only through a cohesive-distributed platform wherein corporates, fintechs, SWIFT, and the beautiful minds across the world coexist.
3.Revamp of International Standard Banking Practice (ISBP) and International Chamber of Commerce (ICC) rules?  For e.g., banks may take 5 - 7 days to respond once they receive document after verification. In this case, benchmark for bank response would be few hours (or more real-time perhaps!) if everything is acceptable. Existing rules and practices may have to customize.
4.SWIFT is definitely facing an existential crisis. Remember, what happened to Kodak and Nokia in the smartphone era? The likes of Tesla are challenging the 'better car next time' theory of traditional car companies, and the same is happening to SWIFT in the financial world. SWIFT, with more than 8,000 banks in their network originally designed from pre- Internet era, is still surviving even after 40 years without much changes to their protocols. It always provides a better version than a disruptive version and is getting challenged by blockchain. They have come up with a prototype that can create exclusive blocks for the members, but has its own limitations due to initial higher cost of investment and continued exclusivity by SWIFT.
5.Blockchain as a service (BaaS) is a great step to resolve this uniqueness issue and cost optimization. Implementing BIAN standards will be an added advantage here.

Technology companies should leverage the current disruption wave to amplify its business opportunities. These are time bounded opportunities; Winners and early adopters will take it all, others may just wipe off from the scene. Future is bright for those who constantly challenge the conventions. Blockchain is indeed doing this, and is here to stay for long.

March 7, 2017

Digital twins: Manufacturing embraced them, Will banks follow suit?

- by Shivani Aggarwal and Irene Varghese

The little kid in you and me always wondered if a magic lamp could bring a Jin who could get us everything we wanted. Not just that, we primarily wanted a Jin to help in writing exams so that the results were always 100 percent accurate, and the list went on. The need for outstanding results and unending desires never gets over, instead it grows as we grow. Years later, in today's tech-savvy world, the Jin looks to be coming alive in the form of a twin! Yes, a twin that can simulate real-world conditions, people, and assets; and is aptly called the 'digital twin.'

Digital twins are virtual products which are replications of physical products, systems, and processes that are indistinguishable from their real counterparts. In simple terms, they are high-end connectors between physical and digital worlds. These digital twins give flexibility to users to make changes and figure out the impact without modifying the actual model. This, in turn, enhances the physical assets performance, eventually increasing the operational efficiency of the business.

Tapping into this potential opportunity, digital twins are being widely used in manufacturing. For instance, they are being widely used to detect assembly line malfunctions in the virtual world much before they occur in reality, condense product development time and costs profusely, and develop feedback loops of customers, thereby transforming the business to a great extent. Recently, General Electric was in the news for deploying digital twin technology in analyzing data of big machines such as aircraft engines, locomotives, and gas turbines. They are not only making headway in manufacturing, but also in other industries such as pharmaceuticals, healthcare, and so on.

The financial services industry, which has been a hotbed for technological innovations, should consider leveraging digital twins mainly for two reasons. Firstly, financial services industry is customer-oriented and relies highly on customer satisfaction. Secondly, the banking industry will be further transformed in the coming years with the increased adoption of beacons, smart watches, wearable's, connected cars, and other connected devices. So, a technology like digital twins will help banks in analyzing tons of data collected from various devices. It can help in deep analysis of customers, and study their behavior, desires, and demand; and accordingly offer products and services.

Specifically in the banking sector, the application of digital twins can be manifold - using them to better understand banking operations, get closer to real-world customers, and finally to renovate banking business as whole. In fact, banks can deploy digital twins of key clientele to monitor their comforts and inclinations based on their archived inputs, purchase records, historic usage patterns of products, and services. If banks embrace digital twins now, they will be able to benefit by understanding their customers better, enhancing their products, and in the end, identifying the best business stream, which would have a cutting edge over competitors.

Digital twins are one of the hottest trends for 2017, as predicted by top-rated analyst firms. It is believed that many companies would be investing heavily in these models within the next few years. Raw data is all around, while insightful data gets generated with digital twins around. If companies fail to leverage them, then they will be left behind in this tech-savvy world!