Data: Poison or Cure?
How data intelligence is the cure for complex compliance
In association with
One person’s poison is another’s cure. Data is all around us. It is formed from countless sources and can be used for innumerable opportunities. Over the course of 2020, spurred on by widespread digitization caused by the global pandemic, data emerged as a valuable commodity.
For some, data is a complex beast that poses more challenges than it solves. For others, data is the key to unraveling all their problems. This is especially true of financial services, where the opportunities presented by data are evolving at pace. This report by FinTech research company Burnmark, in association with CUBE, draws from independent research to explore the emerging uses for data within financial services, determine its true value and uncover the opportunities it presents.
Note: This is an abridged version of the report, please download to view in full.
We would like to thank all our contributors
Alternative Data as an Opportunity
The key technologies for digital onboarding have evolved considerably in 2020
There is a clear shift away from on-premise technologies to cloud-based technologies
Tier 1 financial institutions that invested heavily in:
The shift away from on-premise technology to cloud-based providers coincides with increased digitization across the financial services industry.
Most technologies for digital onboarding are currently on cloud
Bank branches are closing at a faster rate than ever before
And financial institutions have adopted digital onboarding in a big way
We looked at what a ‘digital footprint’ meant to financial institutions in 2020
Investment in a digital footprint from January ‘20 to March ’21.
A study of 160 global financial institutions.
Data, is oil or soil or king, depending on your analogy, but it’s very, very important. More data generally is better than less, and more correlated data is useful.
Jonathan HolmanHead of Digital, Santander Corporate & Commercial, Visiting Scholar LIBF University College
Alternative data, supported by the Internet of Things, is enabling the analysis of digital behavioral patterns for a wide range of banking functions
Financial and non-financial information that is secured from non-traditional sources. The data is then run through various analytical tools to derive insights on digital footprints and digital purchase behavior that complement information received from traditional sources.
Financial services firms are building capabilities for next-generation insurance products based on connected car datasets.
Health apps and devices
Health apps and wearables used by medical professionals provide useful data for health insurance and life insurance products.
Shopping destinations, leisure behavior, driving and commuting patterns give real-time data about consumer purchase behavior.
Satellite imagery data
This is already being used in urban planning, related property financing, disaster management, agricultural insurance and land cover mapping.
They are widely being used for commercial loans, fire damage insurance, agricultural financial products and virtual site visits.
Social media data
Social media data is used in banking services ranging from onboarding and customer support to credit scoring and product offer management.
Website and traffic data
Website onboarding and purchase behavior data is widely used in the creation, design and pricing of financial products and services.
This is being used for lead generation, market analysis, price comparison, accounting as well as with open banking APIs.
Super apps can capture data that a traditional bureau does not and enable financial inclusion and credit scoring.
Mobile phone usage
Mobile phone usage data, and data from bookmarks to installed apps to battery levels can be used in alternative lending and credit scoring
This is widely used by banks in digital onboarding, credit scoring, branch digitization as well as in consumer risk management.
Financial services firms can use financial transaction data to gain insights about customer spending behavior.
Interviews and announcements from supervisors, competing firms and industry experts can help give a sense of interest rate outlook.
Database of companies and corporate registers in various countries can be tapped to locate corporate revenue and management information.
Ultimately, as financial services institutions use data to drive decision making, they must ensure their products are delivered without bias and provide responsible outcomes to their customers, which leads to data ethics. Data ethics is the next trend we are seeing with organizations as they work to embed frameworks and adapt their culture to protect data and use it as it is intended.
Rav HayerDigital & Data Analytics Partner, PwC
Regulations and compliance around data in 2020-2021
Anti-Money Laundering Act (AMLA)
Provides for the most substantial and sweeping legislative reforms to the US Anti Money Laundering (AML) and Counter-Terrorism Financing (CTF) laws since the Patriot Act of 2001. The key areas are around whistle blower norms, beneficial ownership registration and violation of laws of the Bank Secrecy Act.
Washington Privacy Act
Washington state will once again try to pass data privacy regulations akin to General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA). It proposes to create an inter-agency task force of local, state and federal officials to produce a comprehensive approach to digital identity verification.
Security incident notification
The Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have jointly proposed that banks will need to notify the regulator about any “computer-security incident” (data breach) within 36 hours of occurrence.
Kleptocracy Asset Recovery Rewards Act
Department of Treasury’s whistleblower reward programme for money laundering became law in 2020.
Digital Finance Package
The European Commission adopted a Digital Finance Package in September 2020 that includes legislative proposals on digital finance, retail payments strategy and crypto assets. This is expected to drive a technology-friendly
cross-border and sectoral data sharing framework with adequate consumer protection.
Video and online identification
The Swiss supervisory authority FINMA has been revising and holding consultations around due diligence requirements for client onboarding via digital channels, the details of which have been included in a circular titled ‘video and online identification’.
The European Commission is evaluating the regulatory framework for electronic identification, authentication and trust services (eIDAS) and is likely to introduce a European Digital Identity by mid-2021 to secure the identification for public and private online services; especially cross border digital services.
Cryptocurrency exchange regulations
The Estonian government passed legislation to tighten licensing requirements for cryptocurrency firms and have said all virtual currency service providers will be treated as normal financial institutions.
Data allows for better and faster access to information to aid in marketing the right product at the right time. Banks aren’t selling consumable goods (clothes, vacations, phones), they are leveraging data to be better financial partners to their customers.
Sylvia YarboughFinancial Industry and Compliance Innovation Expert
Post-Brexit, alternatives to eIDAS certificates will be allowed to be used by Third Party Providers (TPPs) to access customer account information and also allow Account Servicing Payment Service Providers (ASPSPs) to accept legacy open banking confirmation certificates for 6 months of transition.
Data Protection Act
UK’s Data Protection Act (based on the EU GDPR requirements) has been formed into a new, UK specific data protection regime. UK government may consolidate the two laws (UK-GDPR and Data Protection Act, 2018).
Duty of care consultation
The ‘duty of care’ consultation will be initiated by the FCA in 2021 that will focus on strengthening principles of businesses and propose firms’ duties towards customers.
Central Bank Digital Currency (CBDC) taskforce
Announced by Bank of England and HM Treasury, this currency is proposed to be for use by households and businesses and will exist alongside cash and bank deposits. This move is in line with the trend of decline in usage of cash.
China’s micro-lenders (including FinTech lenders) face regulatory overhaul as the capital and leverage requirements are being reformed. Currently they are only regulated by local and provincial financial regulation offices.
New Digital Signature Act took effect in South Korea that enabled the use of electronic signatures to ease conduct of digital business. The law also supported the use of identity proofing technology like biometric authentication and blockchain.
Japan has proposed regulatory amendments concerning fund transfer service providers, crypto asset exchange service providers and industry-wide intermediation services for various products of financial services.
The Reserve Bank of India has allowed banks and regulated lending institutions to conduct video-based customer identification processes for remote onboarding of customers. The onus lies on the regulated entities to ensure safe and secure storage of the video recording with time stamp information.
While regulators have risen to address the exceptional year that 2020 was, by providing guidance about remote working, eKYC, digital onboarding and cyber caution; the regulatory burden on banks and other financial institutions is not expected to slow down in 2021. Continued regulatory focus on data quality and reporting will prevail across the financial spectrum.
Analytics as an Opportunity
Where did investors of data and analytics see the potential in 2020?
- The unicorns and decacorns of 2020
- Big ticket investments of >= $100M received by 7 firms.
- Core areas of business
- Revenue increase ranged from 20% to 174% in fiscal 2020
- Valuations ranged between $1B and $479B
- Size of the Big Data and Business Intelligence market
The Chief Data Officer (CDO) has evolved as a key role in most firms
- First Chief Data Officer every appointed in 2002 – CapitalOne
- Chief Data Officer numbers
- Top management’s access to data analytics 80%
- Global Front line staff access to data analytics 50% (Brazil and Germany fare better at 58%)
- Santander appointed new CDO and head of data transformation in February 2021. The position will lead the initiative to create a data and analytics centre of excellence among other initiatives
- 700% rise in data generated by the financial services sector each second, 2016-2020
- Unstructured data remains majorly non-analyzed. Barely1% is run through analytical tools
Do organizations care about this data?
- Big data and analytics are creating the desired outcome
- The number of companies that have invested more than $500M in data initiatives
- Data and analytics are important to the business growth and digital transformation 94% of respondents
- 9.1% of executives pointed to technology as the principal challenge to becoming data driven
- Cloud migration from 2016 to 2020 driven to 100%
Manual processes are not only time consuming but prone to error. We have seen that where forward looking reviews have been done effectively, the result has been the digitization of work streams and greater efficiencies across many business processes, while continuing to offer high client service levels. It’s a win-win situation.
Linda GibsonDirector, Head of Regulatory Change EMEA at BNY Mellon | Pershing
RiskTech meets RegTech
RegTech for regulatory change management and traditional risk management capabilities are now merging together with adaptable and scalable new products.
Regulation evolves from addressing risk. The two are inevitably linked as they both relate to the overall effort of managing risk. When a financial institution is faced with a new set of regulations, it will mostly reach out to buy or implement a technology tool to enable compliance with that particular regulation. However, it is often the case that the solution has not served its full purpose because the same tool can also be used to mitigate the risk in the first place. Artificial intelligence is armed with machine learning algorithms that can better assess credit
worthiness (credit risk); vast volumes of data points in a few seconds to produce insights about optimal pricing levels (market risk) and several other financial risks like fraud risk, insurance underwriting risk, reputation risk, operational risk and counterparty risk. The ideal situation is the one wherein one, or a combination of, technology tools not only address risk, but also regulation and compliance. This is how common set of tools can address risk and compliance, through RiskTech and RegTech to form an enterprise wide comprehensive solution. Both entail analysing volumes of data (structured – unstructured – alternative) to improve capabilities in both risk management and compliance. RegTech is a subset of RiskTech and there is a meeting point between these two functions which is enabled by common technology products.
Global Bank Survey
The impact of going digital in 2020 for these banks
- 100% of respondents said that 2020 was a year of major transformation for their organization
- 100% agree that new types of data and advanced analytics offer opportunities to compliance teams.
- Phrases used to describe 2020
- What forms of alternative data does your organization currently use?
- What had the biggest impact in 2020 within your organization?