Are financial services companies heading for tough decisions as we emerge from the pandemic?

Having steadied the ship during the COVID-19 pandemic after one of the most severe crises in living memory the global financial services industry has, for a number of weeks now, been shifting gear from firefighting to properly addressing what is transpiring into the new normal.

No organisations have been untouched and all businesses are having to make some very tough decisions on a number of fronts as they get to grips with the state of the economies in which they are operating. In addition to short term adjustments longer-term responses will be dictated by the perception of what kind of national or global recovery we are likely to see.

At the early stage of the pandemic optimists were predicting a rapid ‘V’ shape bounce-back to normality. However, as this crisis has continued there has been a reality check occurring as we witness countries all over the world stumbling back into various forms of restricted living and lockdown as the virus re-emerges into communities.

A recent piece of research by McKinsey amongst 2000 global executives in the banking sector pointed to expectations of a slow economic recovery and patchy growth at best. These executives all agreed on two scenarios for financial service providers; credit losses will be substantial, and income from interest is going to be significantly depressed for the foreseeable future. So there is going to be a double squeeze on profitability just at a time when these organisations need to make some significant investment decisions to ensure the fitness of their business to remain competitive.

Faced with this reality banks, insurers and others are all having to recalibrate the impact of the economic and behavioural changes that have occurred as a result of the pandemic on their customers’ lives - as well as the changes that will have to occur within their own organisations.

Tough decisions around the shape and size of their future workforces have already been some of the initial choices, as media reports have widely reported various redundancy decisions being taken. In the UK alone 100,000 jobs are reported to have gone or being at risk in the banking sector.

However, from a financial crime risk perspective the considerations are going to be very wide ranging and impact a range of areas within the businesses concerned. Heightened risks around bad-debt, fraud and increased customer vulnerabilities are going to be paramount over the next few years.

Absence of face to face contact increases the need to prioritise digital onboarding capability that’s fit for purpose

From a commercial perspective the evaporation of traditional ‘face to face’ routes to market has meant that truly digital methods of identifying and onboarding customers have had to be reassessed and reprioritised to ensure that they are fit for purpose.

Do the current platforms on offer provide the quality of customer experience required to be competitive - more importantly are they capable of properly assessing customer risk without causing too much friction on the sales process?

The increased opportunities presented to financial criminals in the new normal

The prevalence of home working, now so common and likely to remain in place for some time, also has a double impact on financial crime and fraud risk teams responsible for protecting their businesses.

Not only does the prospect of increased numbers of customers working from home give fraudsters and cyber criminals much more opportunity - through the use of malware or social engineering tactics (such as posing as company help-desk teams) - but they will also need to consider the risk factors of their own workforce conducting business in this distributed/remote environment.

Additionally, as we have reported elsewhere in Connect, the increased levels of economic vulnerability of local populations is going to make the temptation of external fraud more prevalent amongst customers under financial distress - not to mention the fertile ground this offers for organised crime groups to exploit.

So faced with this environment what are some of the areas that need to be prioritised from a fraud and financial crime transformation perspective?

Broadening your access to external intelligence

Banks, insurers and other finance providers would be advised to increase their ability to develop a more rounded view of risk. This can be achieved through a re-evaluation of the various data partners you work with to ensure that you have the necessary external intelligence to understand the external environment as things evolve in real-time.

Linking external intelligence to internal customer knowledge

Having the ability to link external intelligence to internal customer data to create a unified, 360 degree, view of the risks that customers pose will be essential to reduce the likelihood of exposing the business to financial crime - but also to improve your ability to treat vulnerable customers with a greater degree of fairness in what looks like being difficult times ahead.

Improving your use of advanced analytics

Reduced levels of resource, exponential increases in the volume of inbound referrals, increased regulatory screening commitments, and the demands of instant decision making can paralyse a fraud or financial crime team. Taking advantage of the various analytic techniques that have become available can transform your ability to create a decision platform that can accommodate a real-time decision environment, without compromising the financial crime mitigation or compliance processes you need to satisfy.

Machine learning, predictive analysis and various other forms of sophisticated link analysis can all enable the automation and speeding up of decision making without compromising risk mitigation and compliance measures that are required.

Centralising disparate financial crime intelligence and teams

The legacy of mergers that took place post 2008 has meant that many organisations have a complex web of fraud and financial crime risk decision making units that are uncoordinated and disconnected. This creates a huge burden on those looking to reduce the cost of customer acquisition while simultaneously trying to speed up the ability to ‘green-light’ applications and get products out to market. Creating a truly unified risk platform that unites the various disparate teams in the organisation and allows them to make effective real-time risk assessments will be essential. This will help to reduces costs and the likelihood of duplication or costly mistakes being made from a lack of data quality.

Increasing collaborative efforts to mitigate risk within and across vertical markets

Criminals of all stripes are often repeat offenders and will have left a footprint that organisations can use to ensure they are not their next victim. Collaborative intelligence sources, such as National SIRA, CIFAS, CUE, or the UK Government’s NFI, have proved incredibly successful at helping companies to mitigate their exposure to fraud and financial crime. More recently opportunities to use Public Sector intelligence sources (in the UK) to help enrich data and identify fraud or other types of financial crime have also become available to use. The financial sector needs to continue to embrace the spirit of cooperation and collaboration in this regard to improve their defences.

Additionally many types of analysis techniques being deployed to block adverse business have been modelled on shared industry intelligence sources - and so it’s vital for these resources to be maintained so as to ensure that these techniques do not become inoperable.

Ultimately there will be certain characteristics of financial services organisations that are able to succeed in the new world that emerges from the COVID-19 pandemic. Those who are able to successfully digitize customer interactions, restructure their operations while simultaneously evolving their value propositions to respond to rapidly changing customer needs will be the victors.

Those who lack the will and ambition take some of the key decisions to transform their business might find themselves struggling to compete in the choppy waters that lie ahead.

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In this issue:

• Is APP Fraud and Payee Authentication likely to be the most pressing fraud issue in 2021?

• How to build an effective CBIL/BBLS loan recovery strategy

• How are financial criminals using COVID-19 to adapt their operations?

• Discover the latest National SIRA fraud trends for 2020

• Find out how Allianz is using SIRA RTQ to create an award winning policy screening solution

• Yoti discuss the future of digital onboarding customers

• VRS' update on helping to identify and protect the financially vulnerable