Tackling digital transformation in Nordic financial services

Tackling digital transformation in Nordic financial services

SWIFT's Business Forum Nordics event examined how the financial services community in the region can deliver technological innovation while managing emerging risk factors.

Introducing the SWIFT Business Forum Nordics 2019 in Copenhagen, Cate Kemp, the organisation's Head of UK, Ireland and Nordics, noted that the financial services industry is moving into unchartered territory. Whether you work for a bank, a fintech or a corporate, customer demands are greater than ever before. New customer experiences are being driven by new and evolving technologies that are bringing new value and efficiencies to existing financial processes, while regulations such as PSD2 are also shaping this change.

While these are exciting times, Kemp also noted that there are those that threaten the financial community by using the same innovative technologies in a malicious or destructive fashion.

Kemp’s introduction neatly outlined the main themes of the day, combining the opportunities that exist as we stand on the cusp of the fourth industrial revolution, with the increasingly varied and complex risks that the community needs to manage.

Technological innovation in payments

The theme of innovation was the focus of the keynote presentation by Silvija Seres, CEO of Technorocks, who noted that technology is changing business models and the need for regulation at a supersonic speed. She added that thinking of this as a problem is like thinking of gravity as a problem - you just have to deal with it. With technology and digitisation, financial organisations need to identify where their opportunities exist.

Seres suggested that those in financial services don't need to know precisely how new technologies work; they just need to know what they can do for them today.

Speaking in a panel discussion, Henrik Lie-Nielsen, entrepreneur, investor and advisor at Tripod noted that banks tend to only invest in the solutions that their big customers want. He used Klarna as an example, saying that any bank in the room could have created a similar e-commerce solution, but nobody did – as it addresses what is perceived as a marginal business area.

Faster payments innovations came under particular focus in a later panel discussion, particularly with regards to the challenges the industry as a whole faces to achieve fast and frictionless payments. Martin Georgzen, Head of Payments Development with Danske Bank, noted that challenges go throughout the value chain when it comes to establishing instant payments. He used the example that the central bank was not set up for the demands of 24/7 payments system.

Dag-Inge Flatraaker, SVP Payment Infrastructures at DNB, noted that banks need the infrastructure in place not only to prove that payments can flow instantly, but also to prove that they can handle the risks of transactions moving instantly.

A big challenge in the instant payments space are the use cases, said Hans Van Den Bosch, Global Sector Head of Consumer Brands, Retail and Healthcare, Global Liquidity and Cash Management at HSBC. The most obvious potential for instant payments is in the B2C space, he added, but changing consumer behaviour away from cash and ensuring the infrastructure for instant payments is essential.

For instant payments to succeed, collaboration, transparency, and understanding how to connect systems is key, Georgzen said, noting that there are nine different payment platforms in the Nordics alone, and banks also connect to a wide variety of corporate ERPs.

While instant payments schemes are currently predominantly domestic, there is an expectation that they will shortly be heading cross-border. Carlo Palmers,
Head of Instant Payments MIs at SWIFT cited a pilot that the cooperative has run with a gpi cross-border payment from Australia to another country as an example. Georgzen also brought up the P27 project in the Nordics to create a cross-border instant payments scheme. He added that the bigger challenge is around currencies rather than countries. Efficient account to account payments can be done instantly in regional hubs better than globally, he suggested.

Establishing AI in financial services

Artificial intelligence (AI) could well have a role to play in the connection story to ensure a seamless instant payment, Van Den Bosch said. Payments will be part of the overall commerce ecosystem, and customers won't have to decide whether to pay with cash, credit or debit at the store; this will be handled automatically with an AI routing the best payment option for that customer at that time.

AI has potential for use in a variety of other financial services areas alongside payments, and this topic was investigated further in an afternoon panel discussion hosted by Göran Fors, Deputy Head of Investor Services at SEB.

Looking at where AI is used today by financial institutions, Jacob Bock Axelsen, Lead Data Scientist in Advanced Analytics and Information Management with Deloitte Consulting, said that image recognition AI is used quite a lot today already, in car insurance claims, for example. Mattias Fras, Head of AI Strategy & Acceleration for Nordea, added that AI is visible in chatbots in banking. He argued that this is still at a fairly simple level so far, but Antti Myllymäki, Head of Artificial Intelligence at OP Financial Group, did note that chatbots take care of around 70% of customer enquiries in some banks.

Axelsen noted that he sees some institutions that don't want anything to do with AI because they don't see how it applies to them. He advised that all banks should be exploring its potential for their business at one level or another. Building trust is a reason it is taking a while for AI to take off in financial services, Fras suggested, as it requires moving from a policy-based approach to a data-driven approach. Also, identifying who in the organisation has responsibility for AI is a vital step. If a bank uses AI for AML, for example, it would likely be the head of AML who is ultimately responsible for that, Fras suggested. As use cases increase, the question over who has ultimate responsibility for AI is something that will have to be addressed. Myllymäki added that data scientists never work alone, they work alongside the business.

The panel also addressed the risks of AI, with a famous example of a rogue Microsoft chatbot that started quoting from unsuitable literature being given as an example of when AI can go wrong. AI can fall apart at any given time if you don't take ownership of your AI strategy, Fras noted. There are a lot of good platforms out there, but if a bank buys one and does not understand what it is doing, things can go awry. It is essential for banks to understand what they want out of AI and craft their policies specifically around that, he advised.

Banking on platforms

Another significant change in financial services is the so-called platformification of banking - where a financial services platform, in the manner of an iPhone, for example, hosts a variety of apps - products and services - from a variety of financial services providers. In the banking space, platforms open the possibility for partnerships between financial institutions and innovative players such as fintechs, which can extend customer reach and save costs.

PSD2 and other open banking programmes are effectively forcing banks to become a platform to some degree, Bent Dalager, Partner NewTech and Financial Services for KPMG suggested. At the same time, cloud-based business services are also driving this. Big Techs are active in the platform space and have been for some time - and now they offer banking services. Dalagar mentioned the recent Apple credit card announcement as an example - commenting that they don't care about fees or interest rates that much; they essentially want to spend money to make money.

There was a good debate during this panel session around whether banks should be on platforms, or literally become platforms themselves. Paula da Silva, Head of Transaction Services with SEB said that she does not believe that banks should be the platform themselves, but rather be accessible through platforms. By contrast, Philip Bredahl, Head of Integrations & Liquidity, First Vice President at Danske Bank, commented that his ideal is that the bank becomes the platform. However, he did note that the challenge in this scenario is not to become invisible, because if you become invisible you can be replaced.

Connectivity was a big issue for da Silva, who said that currently everybody is building their own platform and not connecting to anyone else’s, which is a problem for the industry. She added that the position as a trusted partner that banks possess is one way to remain visible, and financial institutions can leverage this to be in a much stronger position as a result.

Tackling the cyber threat

While the financial services industry is on the threshold of a world of opportunities, cyber threatens to be the troublemaker in the house. Digging into this topic in a panel discussion, Alain Desausoi, SWIFT's Deputy CISO and Head of Technical Security noted that the World Economic Forum ranks cyber attacks as a top global risk. Whether you are a target or not, you could be a victim.

The evolution of cyber threats was outlined by Lance Ryan McGrath, CISO with Danske Bank, who noted how hacking and cyber threats had started in the form of one-off vandalism, moved to one-off attempts to profit, through to today's situation where online organised crime gangs are sharing knowledge and selling tools. McGrath said that it is hard to prioritise one cyber threat over others as it changes on a daily basis. Banks have to try to cover all bases.

Referring back to the previous discussion on platforms and open banking, Michael Busk-Jepsen, Executive Director of Digitisation at Finans Denmark, outlined that there will be new risks introduced as a result that the community needs to be aware of. There may be things that are beyond understanding at the moment in regard to third-party risk, Desausoi added, but the most important thing is to be prepared for the worst.

The challenge with cyber is that it is a risk discipline, McGrath pointed out. Much like with AI, banks cannot just buy cyber security off the shelf and expect it to suit their organisation. He said that banks need to know how much is the right amount of cyber security for them, how much investment they want to allocate to it, and what their risk tolerance is - these can be hard decisions to balance. Busk-Jepsen commented that there is a trend around testing cyber defences, noting CyberDK in Denmark as an example of this.

Collaboration in the community is particularly important when it comes to cyber security. There is a clear need for banks to be connected on cyber defences as customers need to trust the entirety of the market, not just trust one or two banks, McGrath said. He added that the level of open communication in the Nordics is a cultural benefit that banks in this part of the world have. However, on the flip side of this, McGrath said that internal threats are slightly more of a weak point in the region because of the trusting culture - banks are more likely to trust that people have good intentions, and consequences of actions are not necessarily addressed as strictly as they would be in other markets. Busk-Jepsen added that cyber actors need someone on the inside to completely empty a bank, so the internal threat should be taken just as seriously as the external.

Looking forward as a region

Throughout the day, a number of speakers noted that the Nordics is a very digitilalised region compared to virtually anywhere else in the world. It was stressed how important it is that the region retains this position. For example, when it comes to collaboration with the big technology companies, approaching them from an advanced position could help to influence when the region's banks choose work with these companies and when they don't.

Despite this, being well placed for the digital revolution is not enough - a point made by Erik Zingmark, Head of Transaction Banking at Nordea in the opening plenary. He made the point that it is important for banks to think about how they can effectively understand and utilise data. With the information flows and trust that banks have, how can they innovate in this space? The SWIFT Business Forum Nordics showcased a number of ideas on this theme, which will no doubt be food for thought for the delegates now they are back at their desks.

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