Across Europe, we provide corporate banking services supported by deep local market knowledge.
This quarter, our industry experts take a closer look at trends across Europe and how technology changes are impacting Financial Institutions.
Welcome to the latest instalment of our FIG newsletter, which this time takes a closer look at changes and trends across Europe.
In the FinTech and Asset Management space, our sector heads discuss investment in European markets and how this can be best used to connect you to opportunities in the UK, US and Asia.
We also take a close look at how technology changes are impacting financial institutions and insurance companies this year, with cyber security and the EU’s PSD2 remaining front of mind for many.
With recent weeks also welcoming a new Prime Minister and further surfacing the Brexit debate, we’re on hand to support you whatever the situation. To speak to us about how we can help you, please contact your banking team.
Global Head of Financial Institutions Group.
Tackling fraud and financial crime
With the payments industry experiencing ever-increasing levels of cyber fraud, we look at how banks, broker dealers and alternative finance are using artificial intelligence (AI) and collaborating on a global scale to combat the cyber threat.
Around the world, payment systems are moving to a lower-cost and faster infrastructure, whether that is through innovations at SWIFT, implementing blockchain technology, or linking together domestic clearing.
But this need for speed creates new challenges in terms of fraud and financial crime: cyber fraud has increased by 1700% since 20141, based on the number of attacks reported to the Financial Conduct Authority.
Using AI to fight fraud
Given the scale of the challenge, financial institutions can no longer rely on traditional, analogue methods to tackle financial crime and ensure they’re not exposing their underlying customers and systems to risk. As an industry, we need to be deploying the latest AI monitoring systems to spot fraud trends, link financial systems together and prevent criminal activity.
AI is key to preventing and detecting fraud by flagging suspicious transactions and monitoring unusual behaviour, as well as massively improving the speed and efficiency of the payment process.
According to David Christie, CEO of fraud prevention specialists Bleckwen, recent advances in hardware processing power and storage capacities – along with the increased availability of statistical modelling tools – are allowing institutions to apply new AI techniques and algorithms to solve complex, fast-changing business problems.
However, the use of AI is not yet widespread within financial institutions and is often confined to customer service teams. Christie believes that a key barrier to the adoption of AI within payment systems is the ability to trust and explain the decision and accuracy of the algorithms, given the ‘black box’ perception of AI. For the regulators to accept the use of AI to fight fraud and financial crime within real-time payments, institutions need to be able to deliver explainable AI.
Furthermore, to be most effective in the payments industry, AI needs to be deployed within the payment networks themselves, for example in predictive fraud monitoring within SWIFT or MasterCard, rather than merely at one end of the network.
So how do we work as an industry to ensure we are protected against cyber fraud?
Collaboration is key
Christie suggests that the more sophisticated financial institutions are moving away from a ‘wait and see mentality’ and are now actively engaging with the technology. They tend to either invest in their own data science teams and technology, or partner with FinTechs or RegTechs who can offer pre-packaged solutions.
But introducing AI fraud monitoring and prevention programmes into payment systems and networks alone will not be enough to counter financial crime. Fraud is a common threat to all financial institutions and players within the payments industry. We need a shared commitment to work together to combat this issue.
SWIFT provides some useful lessons on the benefits of working together to safeguard the wider payments ecosystem. Following the successful Bangladesh fraud attempt a few years ago, and a number of other instances of payment fraud among its customers, SWIFT has launched its Customer Security Programme (CSP). All members of SWIFT are required to sign up to the CSP, which aims to improve information sharing throughout the community, enhance SWIFT-related tools for customers and provide a customer security control framework. SWIFT also aims to use CSP as a way to share best practices for fraud detection.
Playing our part
At Barclays we are committed to working together as an industry to combat financial crime. Our advanced Joint Operations Centre (JOC), which is responsible for security across Barclays, works with other banks on a daily basis to tackle fraud and financial crime, and to highlight issues that other security teams might not yet be aware of.
The payments command centre team within Barclays works hand-in-glove with our operations centre to tackle payment fraud and is based at the same site in Whippany, New Jersey. This means that unusual payment patterns can be immediately notified to the JOC team, so they can evaluate links to a cyber threat or other suspicious activity. We believe this interconnectivity of operations is key to tackling fraud and financial crime in payments.
As the use of AI evolves within financial institutions, David Christie expects to see an increasing number of institutions using it to weave together thousands of data points from their existing disconnected systems to provide a holistic, 360° view of client activity – and therefore fraud. They are also deploying ‘explainable AI’ so that ultimately the reason will be so easy to understand that the underlying client could manage their own fraud alerts in certain scenarios.
Crucially, he notes that the more ‘AI mature’ institutions also understand that human intelligence and AI work better together than on their own – the combination of the two is a powerful tool with which to tackle cyber fraud.
Of course, as our payments technology and infrastructures evolve, so too does fraud. For example, criminals already coordinate attacks in real time across many channels and will soon leverage SWIFT global payment innovation to do this across borders.
The international payments industry will clearly benefit from coming together to share knowledge and combat fraud and financial crime, while at the same time working with AI providers and regulators to ensure more efficient and advanced fraud prevention techniques are put into practice on a global scale.
To find out more about how you can spot fraud in your organisation, visit our fraud protection hub here.
1 Preventing institutional payments fraud: Basic defences, counter measures and best practices PDF† – SWIFT, January 2019
Head of Overseas Banks, Broker Dealers and Affiliates
Head of UK Banks and Alternative Finance
What’s on the cards for FinTech in Europe?
Europe continues to attract a flow of FinTech investment from Asia and the US, with various countries on the continent vying for the top spot over London. At an operational level, instant payments and value-adding APIs are set to be the big disruptors through the rest of 2019.
The global FinTech market is a very dynamic space. In Asia, the FinTech ecosystem is embedded in daily life and established players dominate the market. This is a contrast to the US, where we are seeing huge investment into new start-ups and traditional payments businesses stepping up their technological investment.
International investment in FinTechs more than doubled in 2018, with investment in European companies reaching over US$34bn1. So far in 2019 we’ve seen this investment trend continue, with both Asian and US names buying into the European market.
Although mergers and acquisitions account for a large slice of this cross-border activity, we’re also seeing a number of Asian companies choosing to develop their own capabilities in Europe organically. For example, China UnionPay, in partnership with Tribe Payments, is now offering European credit cards2.
Fighting for the European FinTech crown
While London has historically been the capital of European FinTech, we are seeing more and more companies choose continental Europe over the UK as Brexit uncertainty rumbles on.
The big question is: which city will claim the title as the next European FinTech hub? There is currently no clear winner, with countries such as The Netherlands, Ireland and Belgium still vying for position.
One important issue in choosing where to establish a base is consumer attitudes towards FinTech, with some countries, such as France, the Netherlands and the Nordic countries seemingly much more open to the concept than others.
A number of FinTech trends continue to disrupt the financial services sector in a variety of ways.
1. FinTechs continue to be perfectly placed to tap into the ever more prevalent ‘now’ culture, with more and more people leading an on-the-go lifestyle. Whether they’re moving money, making payments or simply checking their balances, consumers want to be able to manage their finances wherever they are.
To retain and increase market share, banks and financial institutions must have the right technology and licences in place to support instant or real-time payments, to meet the needs of their customers. FinTechs are well positioned to enable financial institutions to develop their technology infrastructure through collaboration and partnership.
2. FinTechs often reap the benefits of having newer technology, allowing them to be agile and implement APIs quickly3; however, even the fastest adaptors need to ensure they stay ahead of the game. With PSD2’s Regulatory Technical Standard coming into force in September – giving customers unprecedented control over their financial data – we’re going to see a big move towards value-add payment APIs that support banking-as-a-service.
Those that haven’t already built these capabilities in-house are likely to look to partnerships with complementary providers for connectivity through APIs. This was mirrored in our polling at Money20/20 Europe, with 69% of respondents believing that collaborating with FinTechs would be a key role for banks in the future – a significant increase compared to those polled at Money20/20 Asia (41%).
3. We’re seeing some established FinTech companies expand from business-to-consumer (B2C) strategies to business-to-business (B2B). We expect the winners to be those that start by understanding and evaluating the risks of the B2B space, building solutions from the ground up, rather than attempting to adapt an existing B2C model.
Partnering for success
The emergence of more US and Asian players, as well as the shift from London to continental Europe, presents a number of challenges to established FinTechs. To keep pace with the demands of ‘instant everything’ consumer culture and expectations of value-adding APIs, solid strategic partnerships are likely to be essential, whether FinTechs are looking to expand their existing operations or shift towards a B2B service offering.
At Barclays, we will continue to give our FinTech clients access to a number of global outbound and inbound corridors to support their business internationally. Read more PDF† about how Barclays is working with Form3 to support the FinTech industry.
For further information, please contact your relationship director or email us at FinTechNewClient@barclays.com.
Head of FinTech and PSPs Coverage
1 https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/02/the-pulse-of-fintech-2018.pdf PDF† The Pulse of FinTech 2018 KPMG, page 43
Payment acceptance optimisation:
Using customer payment data to optimise card payment acceptance rates.
With the EU’s PSD2 regulations coming into effect along with tougher customer authentication rules this September, what can insurers do to maximise the number of acceptable card payments they receive?
Declined card payments have a significant impact on all businesses and with important regulatory changes due soon, it’s vital for insurers to identify and understand the causes to improve acceptance rates without the risk of losses from fraud and charge-backs.
To put things in perspective, the industry wide average for declined card payments is currently just over 7.5% of all transactions.
It’s important to distinguish between ‘hard declines’– card transactions that no business should put through – and potentially preventable ‘soft declines’.
Our industry analysis shows that approximately 15% of all declines for insurers are potentially due to out of date card details being held on file, while around 19% are down to customers having low funds.
The PDS2 requirement for Strong Customer Authentication (SCA) is likely to negatively impact non-authenticated (ECI 7) transactions. These currently account for around 7% of all card transactions, but from September more customers will have to provide password authentication even if their card is registered on a secure website. This will create greater friction in the transaction process and higher levels of declined payments.
Payment acceptance optimisation
Payment acceptance optimisation (PAO) can help insurers maximise transaction income while reducing risk to a minimum by analysing how they handle card transactions.
This can involve a range of possible solutions, such as deploying an updater service enabling insurers to update customer card details before attempting authorisation, thereby cutting the number of declined payments.
An updater can help reduce incorrect card numbers, expired cards and ‘transaction not allowed’ declines that tend to indicate out of date card information.
There is also the opportunity to use enhanced decline codes to provide more detailed information about the underlying reasons for declined payments, enabling the business to take appropriate action.
Our data shows that card holders having low funds is the second largest cause of declined payments. So, reorganising the timing of batch authorisation files, even by just a few hours, can deliver improved acceptance rates particularly where customers are paying regular monthly premiums.
The data shows that the key time of day for acceptance rates on batch authorisations is around 10:30am and the best day is Friday, when customers are most likely to have been paid.
This type of transaction data can also help identify the extent to which failed CVV2 codes – the third largest cause of declined payments – are due to genuine customer mistakes or the result of attempted fraud.
Bottom line benefits
UK-based insurer Admiral says it delivered between £3.8m and £6m a quarter after introducing a PAO programme to understand pain points in its customer journey that generate or impact on declined transactions and the associated costs to its business.
This has included introducing an account updater service to keep all customer card details up to date and changing batch processing times to minimise declined payments due to insufficient funds. Read the full case study here PDF†.
UK insurers looking to introduce faster digital payments into new international markets – such as the US where digital adoption has traditionally been slower – will clearly need to consider the local appetite for card-based premium payments and have the capability to navigate and optimise the local payment landscape.
How we can help
Whilst the stepping up of transactions post the implementation of ‘Strong Customer Authentication’ (SCA) has the potential to increase friction within the transaction journey, there are exceptions available to merchants, including ‘Transaction Risk Analysis’ (TRA) exemptions. The individual transaction value up to which TRA exemptions can be applied are acquirer-specific, based on portfolio fraud performance. If you are interested in our TRA exemptions proposition, please speak to your relationship director for further information.
Leveraging our unique position as both an acquirer, card issuer and gateway provider, we can work with insurers to develop effective PAO processes and assess customer behaviour across all payment channels to optimise payment acceptance, as well as benchmarking individual providers against their industry peers. For more information on PAO, please see our latest webinar in our Evolving Insurance series.
Barclays Head of Insurance UK
PSD2: The EU’s Revised Payment Service Directive (PSD2) brings in new laws aimed at improving consumer rights and enhancing online security.
SCA: Strong Customer Authentication (SCA) is a new requirement from PSD2 which relates to how online payments are authenticated. For certain transactions, SCA now requires a two-factor ID check, which can include (but is not limited to) a customer’s PIN, password, fingerprint or payment card.
Non-authenticated (ECI 7) transactions: An Electronic Commerce Indicator (ECI) value of 7 is returned from the Directory Server (Visa, MasterCard etc.) when the authentication of a transaction is unsuccessful or not attempted.
CVV2 code: A CVV2 code is the three- or four- digit code printed on the reverse of payment cards that is required for security purposes when making a purchase online or over the phone.
All abroad for Luxembourg
Luxembourg is fast becoming the onshore domicile of choice for Alternative Investment Funds (AIFs). This includes private equity (PE) backed and closed ended buy-out, credit, infrastructure and real-estate funds.
As we mentioned in our last article, we’re seeing an increasing trend in non-banking financial institutions (NBFIs) looking to establish an EU base in countries such as Belgium, The Netherlands and Luxembourg as one way of planning for a range of possible Brexit outcomes. Combined with the new EU Alternative Investment Fund Managers (AIFMs) directive and the increasing desire to move onshore, AIFs are showing particular enthusiasm for establishing new funds in Luxembourg.
The Luxembourg government has pledged to make it the number one onshore domicile for private equity by 2020, and the latest statistics from The Association of the Luxembourg Fund Industry1 suggest it is well on its way to achieving this. Indeed, it is now widely regarded as the world’s second largest fund centre2, after the US, with more and more AIF firms setting up and domiciling their funds there.
Luxembourg has long been a popular destination for asset management firms, investment funds, and aspects of the wealth management sector. More recently, it has positioned itself as a centre for the alternative investment funds sector, attracting a large number of closed-ended credit, buy-out, infrastructure and real estate funds.
With its favourable tax regime and well-developed regulatory infrastructure, Luxembourg has ensured that its laws are AIF-friendly with rapid implementation of the Alternative Investment Fund Managers Directive (AIFMD), which grants a European passport to the AIF managers. Hence, its international disposition and proactive approach to the AIFMs regulation makes the country an attractive base for PE structures with cross-border components, and it is fast becoming a centre for onshore funds at the expense of traditional offshore centres.
Luxembourg is also becoming a hub of broader financial services expertise, attracting major institutions across insurance and other areas, and a range of innovative FinTechs.
Complex financial requirements
Funds choosing to domicile in the Grand Duchy, as in other European countries, tend to have relatively complex financial and banking needs. AIFs do sometimes face the same complexities as some other NBFIs in having to use myriad systems across multiple jurisdictions when doing business across Europe. They may have other specific challenges too due to the nature and complexity of the funds involved which fall broadly into four categories:
Specialist Private Equity support
We’re seeing a big increase in AIFs and their regulated fund administrators looking for specialist banking solutions in Luxembourg that help simplify these complexities. However, few banks in Luxembourg are geared up to handle all of the needs in the alternative investment fund space across lending, operational banking and FX services.
Barclays is one of the few international banks in Luxembourg with the appetite, specialist expertise and know-how to onboard these complex entities quickly to provide the required support across a broad range of services.
In addition to our specialist private equity expertise, our banking platform allows clients to benefit from a simple, consistent platform anywhere in Europe – avoiding the frustrations of dealing with multiple approaches to systems, billing and reporting in different countries. For further information, please contact your relationship director or our New Client team.
Head of Funds and Non-Bank Financial Institutions for Europe
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