Here, encompass industry adviser Dr Henry Balani, a financial services expert and academic, examines the key developments within the latest directive and what they will mean.

 What is 5MLD and how is it different from previous anti-money laundering directives?

5MLD represents the latest update to the Anti-Money Laundering (AML) directives put out by the European Union (EU). Like those before it, its goal is to stay current and on top of changes in money laundering techniques that criminal actors have been adopting.

Financial crime continues in whatever form is available to these bad actors, and regulators need to adapt to these changing circumstances with new updates. 5MLD is especially pressing, given the high-profile terrorist attacks in Paris and Brussels in 2015 and 2016 respectively. In both cases, terrorists used non-conventional techniques to finance their criminal activity, including the use of pre-paid cards, which under 4MLD was not adequately covered for potential money laundering abuse.

The Panama Papers leak in early 2016 also highlighted the shadowy nature of how corporations can hide the true owners of shell companies that are used for illicit activities.

Politically Exposed Person definition clarified

There are several major updates that distinguish 5MLD from 4MLD, with the first clarifying the definition of a Politically Exposed Person (PEP).

Under 5MLD, member states will be required to identify beneficial owners and to maintain public registers of these.

By virtue of their positions, PEPs are more susceptible to corruption, given their government role and influence. Corruption is a predicate crime to money laundering, and financial institutions have to conduct enhanced due diligence on their PEP customers due to this increased risk.

Previously, there was no clear definition of a PEP – for example, while the Mayor of London is a PEP, what about the Lord Mayor? How about a Mayor of a small village in Spain? To achieve some level of consistency, member states will now need to maintain a list of prominent public functions that Obliged Entities (OE) – institutions that are required to comply with the Money Laundering Directives – like financial organisations, can then use to develop their due diligence procedures.

While this change is a step in the right direction, there are still challenges, which are largely due to the inconsistent definitions of these functions, especially across all the different EU member states.

More of a spotlight on information sharing

The second update relates to information sharing by EU member states’ Financial Intelligence Units (FIU). FIUs are tasked with identifying potential money laundering activity based on information received by financial institutions that report suspicious activity. Sharing information across member states helps improve criminal activity detection, especially when these criminal activities move across borders.

5MLD requires member states to set up centralised bank account registers to identify account holders, including the Ultimate Beneficial Owners (UBO) of these accounts. Ultimately, OEs will need to be able to set up efficient processes to share their customer account information with the FIUs.

The Paris and Brussels attacks have heightened the role of law enforcement in identifying terrorists, which results in these agencies requesting customer account information without the need for suspicious activity reports (SARs).

Under 5MLD, member states will be required to identify beneficial owners and to maintain public registers of these.

Previously, law enforcement agencies would only act on potential money laundering suspicions based on the filing of SARs by OEs. However, 5MLD now allows law enforcement agencies the ability to track potential terrorists without these SARs. OEs will need to be able to provide timely, accurate and relevant customer account information as needed.

More transparency is now required when identifying UBOs

Another significant update within 5MLD relates to the need for additional transparency related to identifying UBOs of corporations.

The Panama Papers leak made clear that many shell companies were used for both legitimate and nefarious business transactions. Shell companies make it easy to ‘hide’ assets of corrupt government officials (PEPs). The Prime Minister of Iceland is one prominent PEP uncovered in the Panama Papers leak, resulting in his removal due to less than transparent financial transactions.

Under 5MLD, member states will be required to identify beneficial owners and to maintain public registers of these. The result of such public registers is an increase in transparency, making it more challenging to disguise illicit transactions including terrorism and money laundering.

Added screening around virtual currencies

The rise of new financial technologies has provided consumers with greater choice and flexibility in conducting financial transactions across borders. An example is the introduction of cryptocurrency, including bitcoins.

Virtual currency exchanges and custodian wallet providers have now sprung up to service consumers. However, criminals also take advantage of these financial technologies. The innovation from cryptocurrency requires regulations to prevent widespread abuse. 5MLD changes require virtual currency exchanges to screen their customers for potential money laundering. Banks will also now need to screen these virtual currency exchanges as well, including their customers.

Cryptocurrency already holds great promise when it comes to driving greater efficiency and lowering costs for cross-border transactions, and the 5MLD requirements can help in greater adoption of this new technology.

5MLD changes require virtual currency exchanges to screen their customers for potential money laundering.

Lower identification threshold for pre-paid cards

Other innovations in financial technology have also resulted in the greater use of pre-paid cards. Unfortunately, post analysis of the Paris and Brussels attacks revealed that the terrorists financed their activities using these prepaid cards. These anonymous instruments made it easy for them to disguise their identities, consequently meaning it was difficult for law enforcement agencies to track their financing operations.

As a direct result of these attacks, 5MLD now lowers the identification threshold of these prepaid cards to over €150 (down from €250), with any remote payment transactions over €50. Any institution selling prepaid cards will need to conduct due diligence checks on their customers to identify suspicious transactions.

It is clear that technology innovation and new payments processes are driving greater ease of use in financial transactions globally. While they benefit the general public, bad actors will always be looking to take advantage of these trends to finance their illicit activities.

5MLD represents a significant step forward in addressing these loopholes. However, technology change, especially in financial services, continues to accelerate. 6MLD is already in discussion amongst EU regulators. And it is clearer than ever that there is a need to make it count if we are to stay vigilant and on top of the never-ending fight against money laundering and terrorism.

Website: https://www.encompasscorporation.com/

Ralf Gladis, CEO of Computop, answers questions surrounding regulation and global consensus, with some interesting pointers on privacy and trade therein.

Cryptocurrencies are expected to reach a major turning point in 2019, but they still attract a great deal of controversy. There is no doubt that the digital currency market is growing, and fast, but support from the institutions that matter is far from consistent.

In November, Christine Lagarde, head of the IMF called for governments to consider offering their own cryptocurrencies to prevent fraud and money laundering. Governments, by contrast tend to err on the side of caution, with the vast majority sceptical of what they see as the ‘Wild West of crypto-assets‘ in which investors put themselves at unnecessary and heightened risk. In part this is because a core role of government is to prevent turmoil in central systems, however many have acknowledged that cryptocurrency has a momentum that cannot be ignored and that regulation could help to bring about a more sustainable and less volatile crypto environment.

The scenario is changing all the time, and it is worth considering what would actually happen if all governments agreed that digital currencies were good:

1. Currency formats: If all governments loved crypto currencies they would probably not love the same currency, so if one country introduced Bitcoin and another Ethereum, we would then be faced with the difficulties of handling the exchange.
2. Economic Policy: The value of money is a playground for politicians of all sides. Expanding the availability of money, for instance, leads to devaluation of a currency which is supposed to help export-orientated economies when selling goods and services abroad. Such policies can only work if a government has the sole power to expand or decrease the amount of money within its own economy. No central bank would be willing to give that power away. That’s why we would end up with many crypto currencies in different countries.
3. Regulation: It‘s vital for a government to avoid money laundering, fraud and tax evasion. This is simply necessary to protect the country from financial crime and to comply with international rules. Therefore, a crypto currency would be regulated by each country’s central bank according to current local requirements for Anti Money Laundering (AML) and Know-Your-Customer (KYC).
4. Cash: Despite the availability of crypto alternatives we wouldn’t get rid of cash quickly. With no experience of what a non-cash society means, there are huge risks simply because of a fascination with a new technology. What about people who are travelling abroad, or those who are unbanked?
5. Privacy: A crypto currency can ensure privacy. However, it can also be designed to be open and very transparent. If crypto currency was THE new currency it would need to be transparent to regulators and criminal investigators. If the design were open to government access this could cause a privacy nightmare. Currently, payment data is distributed over many issuing and acquiring banks. Accessing this legally is not easy and requires a judge. A large transparent crypto currency database which is open to governments sounds like an invitation for misuse by government agencies that might mean well but would do ill anyway.
6. Trade: B2C transactions require payment schemes that act as a mediator between merchants and consumers. Schemes like Visa and MasterCard have established a worldwide rule-set that balances the interests of merchants and consumers. What if a fraudster used a fake identity and the actual consumer required the merchant to pay back his money? What if a consumer sent back a few products and required a partial refund? And if the merchant failed to react? Many such exceptional but nonetheless possible scenarios are the reason why issuing and acquiring banks have to enforce the rules set by Visa and MasterCard. That also applies to other payment systems like American Express, Discover and PayPal who set and enforce their rules themselves directly with both consumers and merchants. B2C payment needs schemes. In that respect it doesn’t matter whether the currency is digital, physical or crypto.
7. Ecology: Several central banks have already tested crypto currencies. The result was devastating. For large scale use crypto currency is much too slow and requires too much energy and storage consumption to be feasible.

It looks like there is still a lot of work to be done before crypto currency gets anywhere near to being acceptable to governments.

It has equally attracted the attention of retail investors and potential bad actors. Combine the elements of hype tactics, fanciful notions of a new paradigm, and greed, we have the perfect market factors which could induce a frenzy unlike we’ve seen since the beenie babies craze. Oh wait, this sounds awfully similar to 2017, does it not? Below Jamar Johnson, crypto expert and owner of Otravel.ai, explains the potential regulation trends we may be looking at when it comes to cryptocurrencies.

Sure, many are now jumping on the blockchain bandwagon, and it is up to responsible regulators to guide the market and its participants responsibly for the next wave of blockchain mania, if and when it arrives. However, we must take on a more nuanced approach to said proposed regulation: how does a regulator support true innovation while not stifling its stated goals through high-cost barriers to entry as some might argue has taken place in New York with the BitLicense? How does countries like the United States incorporate policy frameworks that are similar to Singapore and Malta which are emerging as a hotbed for attracting blockchain talent? The issue becomes even trickier, when one factors in the opportunities for wealth creation (estimated to be in the trillions) despite the US currently lacks a comprehensive framework towards the blockchain across all 50 states.

Self-regulation organisations are commonplace in other sectors - for example, the Regulatory Authority in the Financial sector (FINRA) plays a major role in the Regulatory organisation of the broker and exchange.

The current EU laws do not provide protection to any investor who can be exposed to the risks of digital asset markets, taking into account the significant prices and the lack of supervision of offers and exchanges.

While many nations have discussed their policy towards the blockchain and cryptocurrencies, some of the smallest countries and regions have quickly moved into the creation of novel laws and programs designed to attract top talent within the blockchain space--like Malta, Singapore, and Puerto Rico being the closest US example, to date.

New and evolving financial technology companies need to comply with a network of laws and regulations that are designed to help customers and finance their finances and reduce the costs of repairing terrorists.

Across the pond, the Financial Authority of the United Kingdom provides fintech companies with a single domestic finance Regulatory Authority, clear qualification and test parameters, the possibility of waivers (on permission and review) and direct cooperation with Regulatory Authority.

The initial coin offer (ICOs) have become a popular way for businesses to earn money by launching a new digital coin in exchange for crypto currencies such as bitcoins or air. In countries like the US, it will be prudent for ICO founders to have clear guidance from a professional lawyer or legal team to help navigate the complex body of legals and regulations surrounding the offering of securities and meeting the Howey Test.

Last year, the Financial Authority (FCA), the UK's Financial watchdog, issued a statement detailing the risk of investment in ICOs.

In February, the U. s. Treasury Committee, which consists of several politicians, launched a request for digital currencies and a dispersed technology or a blockchain.

Part of the act requires digital exchange and portfolio to apply customer-specific care checks such as banks.

The regulatory environment within the US concerning digital currencies are not clear just yet. But we know they are coming and on its way to being formed (look into places just as Puerto Rico, Wyoming, or New York as an example). But regulations are coming. New announcements and stances are being made on a recurrent basis. The benefits for proper regulatory structure in the US is not there just yet, but the opportunity is too great to ignore: new tax base, the ushering in of the next waves of America’s greatest entrepreneurs, and the shape the narrative for the blockchain revolution currently underway.

This is according to Henry Umney, CEO of ClusterSeven, as he offers his views on the regulatory and risk management trends in the banking and financial services industry for 2019.

Brexit will confound banks in 2019, whatever the outcome

The UK’s departure from the EU at the end of March will continue to have a significant impact on the banking, insurance and asset management sectors throughout 2019, almost regardless of the nature of the final departure. Brexit uncertainty is presently forcing banks to implement their most stringent contingency plans, in terms of re-locating critical business services, processes, and in extremis, specific roles and personnel. To this end, division of data, processes and responsibility need to be managed carefully to ensure these changes are executed smoothly, efficiently and with full auditability. Further complexity is provided by the UK’s Prudential Regulatory Authority’s (PRA) announcement that institutions will be able to continue to trade as branches of their head office, rather than as a (more capital intensive) subsidiary post-Brexit. This, alongside the European Banking Authority’s (EBA) recent announcement that it sees ‘back to back trading’ between the City of London and the EU as beneficial, suggests that there is a willingness to find a modus vivendi that allows complex cross-border transactions and business processes to continue as normal, almost regardless of the final Brexit outcome.

This complex, conflicted environment will place a premium on understanding how disparate business processes and applications, including how end user supported processes (e.g. using spreadsheet-based applications) are configured, allowing institutions to respond quickly to new developments – and potentially even reversing previous decisions about re-locating people, roles and business units.

Regulators and auditors will demand mature model risk management

In the US, the momentum for a mature approach to model risk management will gather further pace as government frameworks including SR 11 7, CCAR/DFAST stress testing and CECL, for example, are more closely scrutinised and audited by regulators. Increasingly these governance frameworks are being extended to include the tools that feed the models and there is recognition of the significance of the spreadsheets and other end user supported applications to the models covered by these frameworks.

This approach to sophisticated model risk management will find favour with European regulators too, a trend that is already in motion with regulations such as TRIM and SS3/18. This is fundamentally driven by regulators’ collective objective of demanding visibility of critical models and enhancing the operational resilience of financial institutions. Effective data management, including that stored in spreadsheet-based and other end user supported applications, is central to these frameworks.

To meet the excellence in data governance and auditability as demanded by the regulators in the UK and US, financial institutions will be forced to apply the same level of controls to their end user supported application environment – as they apply to their broader corporate IT environment. This reflects that spreadsheets are often the ‘go to’ tool in developing a broad range of business and financial models.

The transition away from LIBOR will present a major operational challenge

Due to the enormity of the transition from LIBOR (London Interbank Offered Rate) to alternative reference rates (e.g. SOFR, Reformed SONIA SARON, TONAR), financial institutions will begin adjusting their processes and systems, in preparation for the switch to new reference rates by the end of 2021. The clock is ticking.

With a parallel universe of spreadsheets connected to enterprise systems such as risk, accounting models and a plethora of non-financial contracts, financial institutions will need to ensure that the relevant changes are also accurately reflected in the spreadsheet-based processes. Given the broad range of potential alternatives to LIBOR, it seems possible that multiple replacements may be in use in different jurisdictions. There will be a premium on being able to identify transactions and contracts quickly and efficiently, and applying the appropriate reference rate, quickly, efficiently – and again with full transparency and auditability.

GDPR has the hallmarks of expanding into a global framework, its compliance will need to be in organisations’ DNA

GDPR has all the makings of becoming a global standard. Already, California is taking the lead with the California Consumer Privacy Act (CCPA), which comes into force in 2020. Other US states are also considering similar regulations to protect the rights of their residents.

With a fine of $1.6 billion levied on Facebook this year, the EU has clearly demonstrated that it means business. In 2019, organisations will have to shift their GDPR focus to ‘sustainable compliance’. They will realise that inventorying IT systems for GDPR-relevant and sensitive data was merely a good first step to meet the compliance requirements on 25 May 2018. GDPR compliance will need to part of their DNA – requiring it to be a ‘business as usual’ activity. With unstructured confidential data (e.g. personal details of clients and employees) often residing in spreadsheets, visibility alongside continuous monitoring, controls and stringent attestation of information will be essential to meeting GDPR demands such as the right to be forgotten and data portability. Automated spreadsheet management will become critical to sustaining GDPR compliance.

The civil rights group wants to highlight the way in which these businesses handle data and asserts that they do not currently comply with the Data Protection Principles of transparency, fairness, lawfulness, purpose limitation, data minimisation, and accuracy.

Tip of the iceberg

Privacy International’s criticisms are based on 50 subject access requests but admits that this investigation has “only been able to scratch the surface” of potential data exploitation practices. In fact, in October the Portuguese data watchdog issued a €400,000 fine to a Portuguese hospital for two GDPR violations, highlighting just how painful fines for non-compliance can be.

With the sheer volume of data financial services companies host, there is clearly scope for major issues if it isn’t managed efficiently. So why are many struggling with GDPR six months on?

Cracking the complexities

The regulations pose so many challenges - industry goliaths can receive hundreds of subject access requests every day, presenting a huge administrative headache. At the other end of the spectrum, SMEs in the financial services sector may struggle to have even the most basic of systems in place to stay on top of data management.

There is also the complexity of understanding exactly what the law requires – what data can and can’t be stored and what the “right to be forgotten” means. Consider for a moment the back-up systems that most businesses have in place – by definition they are designed to not forget things. Does forgetting mean removing references even in long-lost archives? How do companies even begin to know where every piece of data they store on someone is hosted?

Automate, don’t complicate

Despite the endless advice issued in the lead up to GDPR, many businesses still don’t have the necessary tools in place. Companies need robust processes and systems in place to tackle incoming queries and ensure timely follow-up and resolution. Response is not just a matter of customer satisfaction. It’s now the law.

Fortunately, technology can play a big part in easing the GDPR burden. Some of the time-consuming administration surrounding GDPR can easily be handled by having an automated system to capture data requests thus freeing up the human workforce to focus on more added-value tasks. An automated system can help companies retrieve information requested by customers, especially if they hold multiple forms of data on them.

Ironically, given that many worried GDPR would be the bottleneck to its widespread adoption, AI will prove central to automating subject access requests. Embracing technology that continues to grow increasingly knowledgeable in the intricacies of GDPR and algorithms will automatically see necessary data deleted when customers request to be forgotten.

This removes the burden of compliance from financial professionals, who may legitimately spend hours trawling systems for any reference to one client, when AI can manage this in a matter of seconds. Professionals can utilise this time saving by adding value to clients instead – strengthening relationships and increasing the chances of them being brand advocates, rather than requesting to be forgotten.

No financial services company wants to see its name in the headlines for falling foul of GDPR requirements – both the financial penalties and reputational damage will prove difficult to bounce back from. Clients will inevitably move to competitors if they are suspicious that data processes aren’t up to speed. It’s therefore imperative that all businesses automate their GDPR processes, rather than struggling in silence and risking severe damage to their company in the process.

Almost a year in, is MiFID 2 fit for purpose, and what needs to be done to make sure that financial services companies start to comply? Below Matt Smith, CEO of SteelEye, explains.

Failure to comply implied threats of reputational damage and harsh fines from the FCA and so, come implementation day on January 3, those firms which hadn’t digested MiFID II’s 1.4 million paragraphs of rules in time were left living in fear of a crackdown from regulators.

Eleven months in, that crackdown has yet to materialise. And while a number of firms have undertaken the effort and expense to implement MiFID II’s myriad rules in full and have hopefully reaped the benefits of doing so, an equally substantial number haven’t – and regulators appear to be turning a blind eye.

This ‘softly, softly’ approach by the FCA has been picked up by commentators. Gina Miller, head of wealth manager SCM Direct, recently called for the Treasury to investigate the FCA for its failure to enforce MiFID II. This was in response to an April investigation which uncovered fifty firms in breach of MiFID II’s transparency rules. Despite receiving this dossier, the FCA wrote only to eight of the firms.

Given the breadth and complexity of MiFID II, most in the industry weren’t surprised that the FCA didn’t react strictly to non-compliance immediately after January 3. Equally as important as complying with MiFID II was that the markets affected by it continued to function effectively – which necessitated giving some time for the new rules to settle down.

But the lacklustre approach of the FCA is less understandable now we are approaching the anniversary of MiFID II’s implementation day. At the very least, it is unfair to those firms which took the time, trouble and expense to comply with MiFID II right from its implementation date – particularly smaller companies lacking substantial in house resources in technology and compliance.

The FCA’s unwillingness to enforce MiFID II is, unsurprisingly, having an effect on the number of firms making an ongoing effort to comply. As evidence, ESMA recently published its data completeness indicators, which showed a significant shortfall in companies’ compliance with ESMA’s data filing requirements – often submitting unsatisfactory data that is incomplete or late.

Ongoing ambiguity with MiFID II’s rules may be in part to blame. In the build up to MiFID II, many firms didn’t seem to fully understand what was actually required of them. This knowledge deficit was worsened by a lack of clear guidance from the FCA, which has continued.

Across the industry, the FCA has been criticised for this ambiguity, arguing that it makes it near-impossible to comply with the regulation. Even within firms, individuals have come to different interpretations of the rules and, throughout the industry, there is little coherence when it comes to compliance and what needs to be done by when.

The FCA has claimed that its soft approach to enforcing compliance is soon to end, meaning firms could soon have to embrace MiFID II or risk being left behind. But with ambiguity remaining and a number of hurdles ahead, many in the industry are beginning to wonder if the FCA even knows what exactly it is going to be enforcing.

The shadow of Brexit looms large and the future of London as a financial hub is still unclear, as is definitive information on what regulatory regime will apply: a paper backed by ex-Brexit Secretary David Davis suggests numerous reforms to MiFID II. Moreover, the form and scope of MiFID II could soon be set to change considerably, with MEP Kay Swinburne already hinting at the possibility of a MiFID III.

This leaves both the FCA and financial services firms flying blind when it comes to both compliance and enforcement. This climate of uncertainty puts on hold the achievement of MiFID II’s goals of increasing transparency, investor protection and market competition.

If these goals are to be realised, a more responsible stewardship of its own rules – and uniform implementation of them – must be enforced by the FCA. If the FCA delivers on what it promised with MiFID II, out of enforcement a more transparent, competitive and efficient industry should emerge.

A greater proportion of IT decision-makers in the financial/banking sector see key financial services regulations as a driver of innovation (34%) than regard them as a barrier to it (24%).

More than a third (34%) of IT decision-makers across the UK financial sector regard key financial services regulations such as PSD2 and FRTB as a driver of innovation within financial services organisations, while fewer than a quarter (24%) see them as a barrier to it. That is according to survey of IT decision-makers across a range of financial and banking sector organisations, including retail and investment banking, asset management, hedge funds and clearing houses.

The survey, commissioned by software vendor, InterSystems, also found that just 20% of these decision-makers believe their organisation is very well prepared for the roll-out of the new regulations.

Graeme Dillane, financial services manager, InterSystems said: “Historically, firms have responded in a piecemeal fashion by putting in place new siloed applications to meet the needs of each new ruling. The latest round of regulations raises the stakes by effectively demanding businesses break down their data silos, better integrate their data enterprise-wide, and analyse it in real time in the context of new event and transactional data. All of that makes it vital that organisations innovate now.”

To lay the foundations for innovation, firms need automated systems. Currently, however, automation levels are low. Just 21% of the sample said they had fully automated the processes they had put in place to meet regulatory and compliance demands. 33% said they had not automated them at all.

More positively, the survey indicates that IT decision-makers across this sector are aware of what needs to be done to change this. Nearly two thirds (66%) said that they expect innovative technology will have an important role to play in ensuring regulatory compliance for financial services businesses over the next five years.

“It’s clear that financial services businesses increasingly understand just how crucial it is to actively innovate in order to address the challenges presented by the latest industry regulations,” says Dillane, “and the good news is that we are starting to see evidence on the ground that they are seeking out new solutions to help ensure their compliance.”

(Source: InterSystems)

New entrants to the banking market — including challenger banks, non-bank payments institutions, and big tech companies — are amassing up to one-third of new revenue, which is challenging the competitiveness of traditional banks, according to new research from Accenture (NYSE: ACN).

Accenture analysed more than 20,000 banking and payments institutions across seven markets to quantify the level of change and disruption in the global banking industry. The study found that the number of banking and payments institutions decreased by nearly 20% over a 12-year period – from 24,000 in 2005 to less than 19,300 in 2017. However, nearly one in six (17%) of current participants are what Accenture considers new entrants — i.e., they entered the market after 2005. While few of these new players have raised alarm bells among traditional banks, the threat of reduced future revenue growth opportunities is real and growing.

In the UK, where open banking regulation is aimed at increasing competition in financial services, 63% of banking and payments players are new entrants – eclipsing other markets and the global average. However these new entrants have only captured 14% of total banking revenues (at £24bn), with the majority going to non-bank payments institutions. The report suggests incumbent banks will likely start to see a significant impact on revenues as leading challenger banks are surpassing the 1 million customer threshold and 15 fintechs have been granted full banking licenses.

“Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, senior managing director for Banking and Capital Markets, Accenture Strategy. “With challenger banks and platform players reducing traditional banks’ competitiveness and the threat of a power shift looming, incumbent players can no longer rest on their laurels. Banks are mobilizing to take advantage of industry changes, leveraging digital technologies and ecosystem business models to cement their relevance with customers and regain revenue growth.”

In Europe (including the UK), 20% of the banking and payments institutions are new entrants and have captured nearly 7% of total banking revenue — and one-third (33%) of all new revenue since 2005 at €54B. In the US, 19% of financial institutions are new entrants and they have captured 3.5% of total banking and payments revenues.

Over the past dozen years, the number of financial institutions in the US has decreased by nearly one-quarter, largely due to the financial crisis and subsequent regulatory hurdles imposed to obtain a banking license. These factors have made the US a difficult market for new entrants and a stable environment for incumbents. More than half of new current accounts opened in the US have been captured by three large banks that are making material investments in digital, while regional banks focus on cost reduction and struggle to grow their balance sheets.

The research appears in two new reports: “Beyond North Star Gazing,” which discusses how industry change is shaping the strategic priorities for banks, and “Star Shifting: Rapid Evolution Required,” which shares what banks can do to take advantage of changes.

The reports found that many incumbent banks continue to dismiss the threat of new entrants, with the incumbents claiming that (1) new entrants are not creating new innovations, but rather dressing up traditional banking products; (2) significant revenue is not moving to new entrants; and (3) new entrants are not generating profits. To the contrary, the reports analyze where revenue is shifting to new entrants and identifies examples of true innovation happening around the world that can no longer be dismissed. Accenture predicts that the shift in revenue to new entrants will continue and will start to have a material impact on incumbent banks’ profits.

“Most banks are struggling to find the right mix of investments in traditional and digital capabilities as they balance meeting the needs of digital customers with maintaining legacy systems that protect customer data,” said Alan McIntyre, head of Accenture’s global Banking practice. “Banks can’t simply digitally enable their business as usual and expect to be successful. So far, the conservative approach to digital investment has hindered banks’ ability to build new sources of growth, which is crucial to escaping the tightening squeeze of competition from digital attackers and deteriorating returns.”

“As the banking industry experiences radical change, driven by regulation, new entrants and demanding consumers, banks will need to reassess their assets, strengths and capabilities to determine if they are taking their business in the right direction,” McIntyre said. “The future belongs to banks that can build new sources of growth, including finding opportunities beyond traditional financial services. They can’t afford to blindly follow the path they originally set out at the beginning of their digital journey. However, as the report clearly shows, there is no single answer and each bank needs to truly understand the market it is operating in before charting a path forward.”

With the 10^th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.

Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10^th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.

As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.

Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.

Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.

Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”

The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.

If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems  that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.

In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.

Technology advances have changed every aspect of financial markets. For consumers, this transformation has made financial services more affordable, accessible and tailored to our individual needs. For financial institutions, digital tools, including emerging technologies such as artificial intelligence (AI), robotics and analytics, have delivered huge opportunities to radically improve the efficiency and effectiveness of risk management, while reducing costs and better meeting the needs of customers.

However, these advances have also raised fundamental questions around how regulation should adapt. For an industry still finalizing reforms introduced after the global financial crisis, financial technology and innovation present a new round of challenges. That’s why it’s time for financial institutions and regulators to ask: How can we build a regulatory environment fit for a digital future? Below Kara Cauter, Partner, Financial Services, Advisory Ernst & Young LLP UK, answers the hard question.

Technology’s potential to make financial markets safer

It’s inevitable that new technologies introduce new risks, and new twists on old risks, as well as different ways of working. Systems can fail and undermine market stability; machines can make decisions with unintended consequences that harm customers and markets; and the almost limitless data that is the lifeblood of the digital world can be manipulated, misused, stolen or inadvertently disguise criminal behavior. But new technologies also offer significant opportunities to improve risk management and enhance the efficiency, safety and soundness of markets and convenience to consumers.

As a result, financial services firms are constantly tapping into new tools to improve the customer experience and strengthen risk management and compliance:

• Open banking, enabled by application programming interface (API) platforms, allows multiple firms to interact, access and update data to deliver new customer services.
• A combination of algorithms and natural language processing (NLP) delivers financial advice. These advanced machines can also “read” news and digital information sources to evolve strategies, initiate trades and analyze market and customer activity.
• Distributed ledger technologies (DLT) are underpinning new methods of record-keeping, transacting and new mediums of exchange.
• AI, combined with other tools, is enhancing the scope and effectiveness of monitoring and surveillance tools that seek out fraud, market abuse and money laundering, extending the scope and quality of controls application and testing.

Regulators are also exploring how to use technology in their role:

• Using machine learning to enhance surveillance of market activity and check the validity and accuracy of reports and models that firms submit to them.
• Some are considering how digitization and automation could change the way regulations are written, distributed and complied with, while others (including governments) are incorporating centralized digital records of individual and company identities (i.e. digital passports to accelerate the onboarding of new clients to new services).
• Many regulators are establishing regulatory “sandboxes” – innovation hubs – to test new, technology-led services in safe environments, where possible harm to markets or consumers can be limited.

• New products such as cryptocurrenciesare also being analyzed to determine whether they should be covered by existing regulations for other financial activities or products, or defined as a new asset and subject to new rules.

Time to ask new questions about old risk principles

But despite positive moves to deploy technology to improve the security and efficiency of global financial markets, it’s still early days. Both industry and regulators are struggling with fundamental questions around how to identify and describe the risks posed by new technologies and new ways of doing business.

Delivering regulatory answers fit for a digital future will call on all market participants to revisit old principles, ask new questions and work together. Building a transparent, balanced, and connected risk management ecosystem will require:

• Collaboration in compliance: Scale, consistency and investment create conditions that encourage technological improvements and support market-wide benefits, as well as greater risk management. But scarce resources, limited reach and fragmented processes constrain investment by individual firms. Collaboration across the sector can overcome these issues.
• Standardization to speed the path: Digital tools are built on rules and algorithms, fed by data. But inconsistent and unclear definitions and standards for data are hampering opportunities to deploy new technology where it could be most effective: in providing market-wide services and solutions.
• Rethinking accountability and transparency to share the load: Senior bankers have no doubt that they will be held accountable for their organizations’ failings, large and small. But it’s time to rethink the parameters of accountability. When third parties have access to outsourced services data and when more decisions are made, or influenced by AI, who is responsible for breaches?
• Reassessing risk management to accelerate progress: Traditional risk management is built around quantifiable factors such as market, credit and liquidity risks. However, digitized financial markets require a reimagining of these basic principles now that risks can manifest in milliseconds and multiply exponentially, sometimes outside the control of any single person, firm, or function.
• Governing, not just mining, data: Customers see the benefits of faster, customized services enabled by open access to data, but their wariness of possible abuse is growing, and cloud solutions are adding a new dimension to the data ecosystem. Technology-led solutions to monitor, analyze, and protect data can match the scale and magnitude of these risks and enable their management.

Ultimately, as regulators and market participants navigate the FinTech landscape, they’ll need to consider how to best use and regulate the use of digital tools to deliver effective risk management and compliance – without stifling the innovation that can help deliver better and secure financial services.

This week Finance Monthly talks to Daniel Kjellén, CEO and Co-founder of Tink on the democratisation of data and what this means for both financial services businesses and consumers.

Open Banking was designed to open the retail banking market by giving everyone access to the data they needed to deliver banking services. Initially viewed as a massive boon for fintechs, and a worrying threat for banks, the mindset of the latter is shifting.

They may have been slow to start, but today the majority of retail banks are waking up to the opportunities offered by Open Banking. Banks are realising that the new battleground is the level of valuable insights and product offerings, tailored to the individual, that can win over consumers. And the key to unlocking this customer value? Data.

But CIOs and product analysts will be only too aware that data was relatively unmanageable until fairly recently. Historically, legacy systems and fragmented technology stacks have meant that getting the right data-sets in one place has been a huge struggle for banks.

What’s more, being able to use these data-sets to create data-driven insights and support data-driven sales has proved even more of a challenge. This means that, until recently, banks and consumers alike have been unable to make full use of the financial data at hand to make better, more informed decisions.

Out-engineered or the opportunity of a lifetime?

Banks might still be grappling with trying to make the best of their consumer’s financial data. But heel-dragging is not an option.

For several years, banks have been under siege from all sides. The technology that allows consumers to grant third parties access to their financial data has existed for some time, and agile fintechs have out-engineered banks in the field.

There’s no question that the advent of Open Banking has widened the data floodgates now that banks have had to open up their APIs. With data more readily accessible, third party providers in all sectors - from finance to insurance - can begin to compete with the traditional banks by introducing innovative new products and services.

What’s more, these challengers have the advantage of being more agile with their time to market; getting new software off the shelf and into people’s pockets in a fraction of the time previously taken.

Banking on the future

Banks have work to do. They’ve been caught napping by these nimble fintechs who have stolen a march.

Regulation is really only the rubber stamp on a technology-led revolution that was already well underway. Banks are now waking up to the same opportunities by partnering with agile industry players that can leverage the financial data at hand.

They need to act now to keep pace with the new market entrants who have already tapped into a world where the access to financial data is democratised, to build newer and better products for consumers. Instead of inventing the wheel once again, banks can choose to invest in the best technology that will provide them with the right data-sets that will both give them a holistic overview over their customer’s finances, and the ability to deliver data-driven sales and insights, tailored at the individual.

Why does this matter?

Open Banking has changed the way consumers can choose to manage their finances. By democratising the access to financial data, consumers are beginning to understand, and take advantage of, the benefits of sharing their financial information with third parties.

Once faithful to traditional banks, people are becoming increasingly fickle - flirting with other providers to find the best deal, service or experience on the market.

It might be intelligent personal finance technology that can predict consumer spending habits and provide advice and recommendations based on these predictive insights. Or it might be a current account platform that allows people to monitor and change their mortgage and savings in the same place, despite using different providers.

Whatever the specific solution, consumers are feeling the benefit of increased flexibility and choice, and demand for new ways to manage money is growing.

It really is win-win-win

Banks must stop viewing the democratisation of data as a zero-sum game - where their loss is a fintech’s or another bank’s gain. Instead, they should see it as an opportunity to gain an advantage by ensuring that their data analytics capabilities keep them one step ahead of their rivals.

While aggregation is just one part of the puzzle, the democratisation of data opens up a wealth of opportunities for banks. Data-driven banking will allow banks to make better commercial decisions based on their customers behaviour, while PFM (personal finance management platforms) will help banks give their customers a better experience.

There is a huge opportunity for banks to successfully monetise Open Banking through identifying where they can offer customers a better deal to meet their needs and targeting them accordingly with a personalised offer.

In this brave new world of banking, the winners will be those who decide what their unique offer to consumers will be and focus on doing it better than anyone else in the market. This might be providing the smoothest UX, the best predictive personal finance management platform, or the slickest analysis and insights tools. Or it might be offering the best products in one particular area - for example the most competitive rates on mortgages or loans

Unlocking this opportunity might require developing new customer centric platforms in house or buying technology of the shelf by partnering with fintechs to take advantage of their technology solutions.

But one thing’s for certain. Far from sounding the death knell for the banking industry, the democratisation of data will become the smart bank’s secret weapon for winning their segment.

It is becoming clear that trade digitisation has huge potential to unlock access to world trade for small-to-medium-sized enterprises (SMEs). The move away from laborious, manual, paper-based processes will lever simpler access to trade finance, now that it is being provided by more agile, technology-friendly alternative funding providers. Here Simon Streat, VP of Product Strategy at Bolero International, discusses the new wave of digital change and the drive it’s providing for SMEs worldwide.

Regulatory burden has meant that SMEs often don’t fulfil certain criteria for banks to justify lending to. The demands of anti-money laundering (AML), Know Your Customer (KYC) rules, sanctions and other banking stipulations have been deemed too time-consuming and too costly to be worth the trouble where smaller exporters and importers are concerned. This is a significant blow, since by some estimates, more than 80% of world trade is funded by one form of credit or another. Until now, if your business was deemed too small to be worth considering for finance, there was hardly anywhere else to go.

The result has been deleterious to the prosperity of SMEs and detrimental to international trade. In 2016, the ICC Banking Commission’s report found that 58% of trade finance applications by SMEs were refused. This, as the authors pointed out, hampered growth, since as many as two out of every three jobs around the world are created by smaller businesses.

This rather depressing view was supported by a survey of more than 1000 decision-makers at UK SMEs which was conducted in February this year by international payments company WorldFirst. It found that the number of SMEs conducting international trade dropped to 26% in Q4 2017, compared with 52% at the end of 2016. Economic conditions and confidence have much to do with this, but so does access to trade finance.

There is a growing realisation, however, that if digitisation makes sense for corporates seeking big gains in speed of execution, transaction-visibility and faster access to finance and payment, it definitely will for SMEs. The ICC Banking Commission report of 2017 estimated that the elimination of paper from trade transactions could reduce compliance costs by 30%.

Over the past few years, for example a number of trade digitisation platforms have emerged offering innovative business models for supplying trade finance and liquidity, while optimising working capital, and enhancing processes for faster handling and cost savings. Progress is under way, but it requires expertise.

Fintechs in trade hubs such as Singapore, where there is huge emphasis on innovation, are taking the lead, transforming the availability and access to finance for SMEs. By making the necessary checks so much faster and easier and opening up direct contact with a greater range of banks, digital platforms enable customers to gain approval for financing of transactions that would otherwise be almost impossible. Not only that, they enjoy shorter transaction times and enhanced connectivity with their supply chain partners.

If we scan the horizon a little further we can also expect to see SMEs benefit from the influence of the open banking regulations, which require institutions to exchange data with authorised and trusted third parties in order to create new services that benefit customers.

Although the focus of these new regulations is primarily the retail banking sector, the tide of change will extend to trade finance, creating a far more sympathetic environment for the fintech companies and alternative funders. Yet the fintechs cannot do it alone, they need to be part of a network of networks that operates on the basis of established trust and digital efficiency.

No technology can work unless it is capable of satisfying the raw business need of bringing together buyers, sellers, the banks into transaction communities. That requires the building of confidence and the establishment of relationships, along with – very importantly – a real understanding of trade transactions and the processes of all involved. It also requires on-boarding and you can only achieve that once everyone knows a solution will deliver the efficiency gains it promises, as well as being totally reliable, secure and based on an enforceable legal framework. All this requires a level of expertise and insight that cannot simply be downloaded in a couple of clicks.

Nonetheless, it seems pretty obvious that thanks to digitisation, the market for SME financing in international trade is set for real expansion.