Bankable Insights - Sibos 2022 edition_November 2022
From digitalisation, sustainability, innovation and talent to financial security and compliance, read expert insights on how to navigate tomorrow's banking
*Bankable Insights* Sibos 2022 edition
Hear from Michael Spiegel, Global Head of Transaction Banking and Marisa Drew, Chief Sustainability Officer on what tomorrow's banking means and how we might get there.
The world’s real economy is in the midst of a historic shift as the trade flows, business models and the markets where goods and services will be exchanged, are changing.
To keep pace, tomorrow’s banking will be about championing digital adoption and data analytics to enable resilience, sustainability, and effective management of new and emerging risks.
At Standard Chartered, we are gearing up for Tomorrow’s Banking. Along the way, we are forging partnerships with financial institutions, fintechs, service providers and corporate clients to offer solutions that allow you to achieve your growth aspirations across some of the most dynamic markets in the world.
The discussions – from digitalisation, sustainability, innovation and talent to financial security and compliance - which dominated at Sibos 2022 will continue. We’ve put our perspectives on some of these perennial topics in this special Sibos edition of Bankable Insights.
I hope this will provide food for thought and look forward to our continued partnership.
Tomorrow’s banking: Creating opportunities for sustainable growth
Tomorrow’s banking: Creating opportunities for sustainable growth
To support the real economy and provide an enabling environment for businesses to grow, it’s time to bring forth the future of banking, harnessing emerging technologies to create new opportunities for sustainable growth.
The disruption, volatility and uncertainty brought about by the global challenges of recent years have injected a new urgency into financial services innovation, propelling the industry into a new tomorrow. To support the real economy and provide an enabling environment for businesses everywhere to grow and prosper, it’s time to bring forth the future of banking, harnessing emerging technologies to create new opportunities for sustainable growth.
Empowering a more inclusive global economy
Although we are living in a more challenging economic landscape than has been experienced in decades, new opportunities for growth are arising.
Global trade is undergoing fundamental change amid a move to ‘just-in-case’ supply chains, as well as changing consumption patterns in developing markets. Amid this rebalancing, intra-regional trade is growing, while emerging markets stand to benefit as companies shift to low-cost markets to diversify production.
As trade corridors shift towards higher growth economies, local suppliers can gain new possibilities to move up the value chain – as long as they can access the finance to do so.
“Improving accessibility for entrepreneurs and SMEs to global and regional supply chains is vital to ensuring globalisation works better for all,” says Michael Spiegel, Global Head of Transaction Banking at Standard Chartered. Financial inclusion is a top priority for the future of trade, and banks must find new ways of getting liquidity to where it is needed.
“Large clients increasingly want to support their suppliers, and want solutions that match their flows,” adds Spiegel. “They want their banks to support them in financing the new-to-market or the deep tiers of their supply chains – suppliers of suppliers and players that need to be included in the new real economy.”
Putting sustainability front and centre
Sustainability considerations are also shaping the future of banking. As environmental, social and governance issues are increasingly integrated into investor decision-making and regulatory requirements across the world, banks are uniquely placed to direct funds towards the companies and projects that are drawing the future of the sustainable real economy, thereby enforcing and rewarding sustainable behaviours and practices in the market.
Standard Chartered’s Sustainable Trade Finance proposition and its Sustainable Account are two solutions which are designed to help companies implement more sustainable practices across their ecosystems and contribute to their organisation’s sustainability goals.
“Sustainability is quickly becoming a ‘license to operate’ for our clients,” says Spiegel. “Here, banks play a critical role. Through the use of data, we are at the centre of clients knowing the intermediaries that are being paid, the logistics companies that are shipping the goods, and ultimately how the customers are buying the product.”
Meanwhile, as governments turn up the pressure on companies to account for their environmental and social impact in a real and substantive way, the visibility that banks have over the entire trade ecosystem can be leveraged to help close the gap between ESG leaders and laggards across different sectors – ensuring that economic growth today benefits not only the current generation but the ones to follow.
Using technology as an enabler of an end-to-end ecosystem
While Microsoft founder Bill Gates said in 1994, “Banking is necessary, banks are not”; the inclusive, sustainable, and transformative future of banking is about marrying the strength, safety, trust, connectivity and reach of banks with technology.
The financial and technological sectors are converging, as the traditionally distinct boundaries which separate the two become blurred. Developments such as digital currencies, blockchain and artificial intelligence can benefit the global economy in supporting financial inclusion and climate resilience, but they also challenge banks to rethink the role they play.
Consumers are seeking simple and seamless digital interactions across the entire financial ecosystem. Corporate clients are similarly expecting the same experience. To meet this demand, banks must invest in cutting-edge technologies – without losing sight of their core proposition as trusted advisors.
“This is a real call to action for banks,” says Spiegel. “Most organisations are moving more decisively forward with their digital transformation, and banks must step up. This means a move away from selling separate products to offering integrated solutions that are fully digitally-enabled – such as seamless one-stop collection solutions for end customers that work both online and offline.”
With their significant footprint, long-standing relationships with governments and regulators, and greater experience managing complex financial products, banks are uniquely placed to create compelling solutions that address the needs of the new economy – but it is in partnership with fast-moving, agile fintech firms that the real value can be unlocked.
And by putting data and analytics at the centre in a truly secure and privacy-protected environment, banks can get a granular understanding of customer needs and create rich and differentiated propositions, laying the foundations for a truly immersive digital experience.
Creating tomorrow’s bank, today
The world is changing, and banking must change with it. To equip businesses around the world with the resilience they need to thrive in the real economy of tomorrow, banks and financial institutions must focus on three core areas:
Corporates are exploring new business models and setting up new supply chains of goods and services, driving the growth and development of new and emerging geographies and trade corridors such as the South-to-South corridor, the intra-Asia regional corridor and the intra-ASEAN corridor.
“With our broad and deep global reach, we are actively playing a part in supporting clients across some of the world’s most vibrant growth markets,” says Spiegel, adding that Standard Chartered recently obtained a full branch license in Saudi Arabia and Egypt, and continues to commit and invest in the largest economies that are driving global economic growth and trade flows, from India to China, Hong Kong, Singapore, and beyond.
Financial institutions in these dynamic markets can harness Standard Chartered’s footprint and strong capabilities to support their clients where the flows of tomorrow will grow, helping them build more resilient businesses that can navigate the opportunities and challenges ahead.
Business and trade are increasingly digital as corporates create and join platforms and marketplaces. The rise of e-commerce offers brick and mortar companies greater reach, and it is enabling new entrepreneurs to access the global market, lowering the barriers to entry for SMEs around the world, while the emergence of digital currencies and e-wallets promise efficient, low-risk, and near-instant international payments.
To ensure digital flows are affordable for all, frictionless, and visible, financial institutions must have the right solutions and banking relationships in place. As one of the largest providers of trade services for the banking industry, connecting most banks to the flow of goods and services globally, Standard Chartered will continue supporting its financial institution partners in the digital places of tomorrow, as clients carry out their business there in the future.
Clients are increasingly looking for banking partners that fit with their social and environmental values, principles, and aspirations. They are demanding more transparent payments; they want visibility on how secure their funds are and what they are being used for. They want responsible banking that is making a positive social and environmental impact.
These demands can be met at Standard Chartered. Having publicly stated its vision to be the world’s most sustainable and responsible bank, the organisation is committed to supporting sustainable economic growth, expanding renewables financing, and investing in sustainable infrastructure where it is needed most.
Driven by technological advances, the future of banking is sustainable, inclusive, and meets the needs of the real economy. But evolving banking for tomorrow’s world requires organisational agility, an aspirational vision, and a holistic approach to the entire ecosystem. In co-creation with clients and partners, the banks and financial institutions of today can lead the way in defining what’s to come, driving positive change across the globe.
How banks can channel finance for a just transition everywhere
How banks can channel finance for a just transition everywhere
As global efforts to slow climate change intensify, banks are leveraging their ability to mobilise capital at scale to accelerate the net-zero transition. But to foster innovation and economic development, fresh approaches must be found to help emerging markets reach net zero without harming their growth or prosperity.
Faced with increased extreme weather events, record greenhouse gas concentrations and a growing energy crisis, the world has woken up to the imperative of net zero. To make real change at the speed and scale needed, the power of the banking industry must be harnessed to channel capital to where it is needed most and finance the new technologies and business models that can underpin the solutions of tomorrow.
There is a huge opportunity for impactful investments to be made in markets across Asia, Africa and the Middle East, which are most at risk from climate change and other inter-related social challenges. However, these markets are often starved of critical decarbonisation and adaptation-focused capital flows.
With emerging markets in need of USD 95tn to reach net zero by 2060, according to Standard Chartered's research, supporting the transition to low-carbon business models around the world represents both a challenge and an opportunity for banks. With fresh perspectives and new financing approaches, this can be achieved while also shoring up ongoing development and economic expansion.
“Standard Chartered’s unique footprint covers many of the emerging and high-growth markets that are already at the frontlines of the climate emergency,” says Marisa Drew, Chief Sustainability Officer. “In frontier markets, people are experiencing acute sea level rise, heatwaves and droughts, and urgently need financing for mitigation and adaptation measures. Meanwhile, in high-growth markets, there’s an increased demand for energy transition funding to support the transition to low carbon technologies. With comparatively lower access to international capital flows than developed countries, these markets need support to finance growth, create the jobs of the future and protect against economic degradation.”
In response to this issue, Standard Chartered is accelerating the deployment of sustainability-linked finance in the markets it calls home. The bank’s Sustainable Trade Finance proposition and its Sustainable Account are two examples. Both solutions are designed to help companies across its footprint implement more sustainable practices across their ecosystems, directing funds towards the companies and projects that are drawing the future of the sustainable real economy, and enforcing and rewarding sustainable behaviours and practices in the market.
Investment capital can have a significantly different outcome depending on where and how it is allocated, and the marginal impact of ensuring a just transition is enormous: the average CO2 avoided per dollar of financing is seven times higher in the world’s emerging markets than in developed nations1. “Sustainable finance will have the greatest impact with clients in emerging and developing markets,” says Drew. “This is why we are focusing on driving a step change in how banks think about where they direct and deploy sustainable finance dollars.
But with a USD 95tn2 investment requirement until 2060 to allow emerging markets to meet net-zero targets while continuing to grow and prosper – a sum greater than global GDP – it is clear that banks cannot do this alone. Finding new ways of freeing up capital will mean crowding in investors and leveraging multilateral and development bank support, and here, the banking industry can also play a crucial convening role by facilitating blended finance.
While large projects such as solar and wind installations readily attract financial flows in the west, earlier stage, smaller climate technology solutions that can help monitor and mitigate the impact of climate change need sponsorship, encouragement, and funding. Banks can support these initiatives – many of which are taking place in markets facing political, currency, and instability risks – by making investment more attractive to investors by creating structures that spread the risk or provide credit support s to enhance the profile of a borrower.
“We have executed USD 10bn of blended finance deals in the past four years, mobilising private-sector resources alongside public funding to get the most leveraging impact,” says Drew. “As a bank, we have the financial expertise, governance frameworks, technology, and geographical reach to unlock this capital, and because of our deep expertise in the markets in which we operate, we’re able to form global partnerships that can find new ways of getting financing to where it’s needed.”
Finding pragmatic solutions for real-world problems
“Out of our 59 markets, 33 countries do not yet have a net-zero commitment by 2050, which means that not all of our clients are on the same pathway as they may not be aligned on same timeframe – for example, India has a 2070 target. We can provide the support and advice that clients need to accelerate their net zero journey,” says Drew, “The global perspective on the pathway to a greener future still overlooks the reality of many economies that have further to go, and we have to ensure that these markets have the same opportunities to access capital for resilience and adaptation.”
Here, transition finance must be a key consideration, especially for clients who are in the early stages of their net zero journeys.
“Energy from fossil fuels still plays a critical role in supporting living standards in emerging markets,” says Drew. “Our clients are striving to achieve their net zero targets, and each is at a different stage in their journey. While the need to act is urgent, we must find the right balance to ensure that people in these markets can continue to be able to support their livelihoods.”
As part of its transition finance framework, Standard Chartered works to provide sector-specific guidance on what its clients must do to prepare for a low carbon future, helping to identify the most relevant transition levers and using its unique footprint to transport learnings to and from Asia, Africa and the Middle East – thereby expanding the reach of financing for the transition to those who need it.
The effects of climate change are growing more threatening by the day, creating a significant opportunity for the financial sector to catalyse, standardise and democratise access to sustainable finance. With the right approach, banks can help support a just transition enabling economic development to continue at pace while securing the future of the planet.
Accelerating sustainability in emerging markets
Accelerating sustainability in emerging markets
What are the top issues and challenges around sustainability, the role of data and the enablers to drive capital to where it’s needed most – the emerging markets?
Evolving banking for the digital economy
Evolving banking for the digital economy
To deliver the efficiency, transparency and experience that new-age, digital-first and digital-only companies of the future demand, banks need to evolve in lockstep.
Around the world, financial services – from payments to credit, savings and beyond – are undergoing significant disruption as the advent of new technology drives a fundamental shift in how businesses operate. To deliver the efficiency, transparency and experience that new-age, digital-first and digital-only companies of the future demand, banks need to evolve in lockstep.
The world as we know it is undergoing dramatic change, and one of the fundamental drivers is digital transformation. In recent years, the way consumers interact with businesses has been revolutionised by an explosion of online sales, while cashless alternatives including mobile wallets and instant payments are driving new behaviours in cash management. Meanwhile, the advent of digital currencies and the growth of the decentralised internet are creating new channels for growth.
As buyer and seller expectations of a friction-free experience rise, banks must find their place in this new world, rethinking the underlying financial services ecosystem to support the economy of the future.
A seamless banking experience
In 1994, Microsoft Founder Bill Gates made the statement: “Banking is necessary, banks are not”, and today, new banking ecosystems often don’t look very bank-like at all.
We live in a digital age, and clients want their banks to be integrated seamlessly into their activities. Now, more than ever, businesses demand seamless, simple interactions, with their bank acting as their financial intermediary across the entire digital ecosystem – which means banks need to plug in to the systems that underlie all of their day-to-day needs.
To stay in the running when it comes to driving the next step of the digital revolution, banks are linking together their expertise and their clients’ aspirations to create rich and differentiated propositions. In this way, banks are no longer just banks, but platform facilitators.
Standard Chartered Link Account
Offer your customers a seamless collection experience, with easy reconciliation in real time and at a merchant level, with our Link Account.
One example is a solution combining virtual accounts with transaction notification APIs, which means treasurers and finance managers can set up as many virtual accounts as they need – for example, one to each customer or one to each subsidiary. Their customers make payments to the virtual accounts which are automatically routed to a single bank account, typically by currency, while the client receives real-time transaction notifications with virtual account information for automated reconciliation.
Another is Straight2Bank Pay, which tackles a key pain point for treasurers by minimising the number of merchant accounts and contracts with payment service providers.
It allows consumers across markets to make online payments in local currencies via various digital payment methods including QR codes and instant payments, transforming the bank into a one-stop digital collections gateway, enabling a multinational with a presence across several countries to accept a variety of payment options from their customers all through a single platform. API connectivity into the client’s ERP system enables treasurers to stay updated with real-time notification on transactions, perform auto-reconciliation and access standardised, consolidated reports. What’s more, it can be tailored to different business needs both online and offline, providing omnichannel e-commerce solutions across various business models.
As banks adopt faster ways of building digital solutions for their clients, the use of data can help inform the development of solutions for the real economy of tomorrow.
“Today, corporate clients are also expecting real time access and visibility versus the traditional service levels in the market,” says Spiegel. “This challenges the traditional approach of banks, and raises issues such as how to manage compliance and risk in a real-time environment, and how to manage client service across new channels to meet both client and regulatory requirements.”
This represents an important consideration since banks operate in one of the most tightly regulated sectors on earth. Compliance concerns, plus laws such as Europe’s GDPR and the California Consumer Privacy Act of 2018, mean enormous care must be taken when leveraging data.
Within these protective boundaries, though, there is an exciting opportunity for banks and financial institutions to carry out advanced analytics to predict and serve the real needs of clients. Therefore, instead of offering a small set of one-size-fits-all products, banks can use all the data they have available to them to provide a truly personalised service, tailoring products to meet the requirements of businesses in the real economy and providing banking as a service at the point of need.
“We are also working to identify the data use cases our financial institution clients value,” says Spiegel. This can be something as simple as alerting a client when a transaction looks different to financial trends, such as unusually large transactions, new recipients, or new countries, or – as in the case of Trade Track-It – providing a window to near real-time data to enable end-to-end visibility of transactions, documents and shipments status.
Trade Track-It: A digital tool that gives you real-time end-to-end visibility
Learn how you can get near real-time online information on your trade transaction, document and vessel status with Trade Track-It.
Banks also have a strategic role to play in facilitating the new economy and the next era of Web 3.0 through the thoughtful adoption of digital assets. This will likely take many forms, including integrating and embedding central bank digital currencies (CBDCs) – a new form of money – with business processes and lifecycles.
“If issued, CBDCs can have important implications for the banking industry. At Standard Chartered, we are working closely with regulators and industry players on the development of wholesale and retail CBDCs,” says Spiegel. “We have worked on multi-CBDC initiatives such as Project mBridge that is led by BIS and involves central banks in China, Hong Kong (SAR), Thailand and the United Arab Emirates.
Such initiatives explore how interoperating CBDCs can improve the efficiency of cross-border payments where we are seeing an increase in demand for efficient, low-risk, instant or near-instant international payments. We see CBDCs gaining traction globally and look forward to bringing innovative solutions to our clients.”
As the digitisation of the real economy continues apace, profoundly changing the needs of businesses, the banks of tomorrow are ripping up the old playbook.
The banking model of the past – conservative, unsuited to rapid change, and slow to react – is no longer fit for purpose, and through wide-scale innovation, banks have an opportunity to prove that transformation at a huge scale is possible.
Understanding the value of data and digitalisation
Hai Jade Fuan, Head of Product Commercialisation for Financing and Securities Services at Standard Chartered, outlines the institution's approach to providing data through digital solutions in both emerging and developed markets. Uncover insights into the strategy and vision around innovation and technology, the shift towards omni-channel solutions, and how it all comes to life through ongoing real-world client examples and upcoming developments being brought to market.
This video was also published in Funds Europe.
Solving for real-world challenges through banking innovation
Solving for real-world challenges through banking innovation
What do CBDCs, digital assets and tokens mean for financial institutions and how can they be safely put to work for the real economy?
The future of banking and finance is being recast by the introduction of blockchain-based technologies. But beyond the buzzwords, what do CBDCs, digital assets and tokens mean for financial institutions, and how can they be safely put to work in service of the real economy?
It is increasingly clear that blockchain technology, digital currencies, assets and tokens will play a significant role in the future of financial services, reshaping the industry through their unique benefits.
Exciting and transformative use cases are emerging, from the establishment of digital currencies and assets as a relevant asset class, to the use of tokenisation to keep track of and validate financial transactions without the need for a paper trail, the introduction of open payment platforms powered by central bank digital currencies (CBDCs), and beyond – and financial institutions need not only keep up to speed, but help their clients navigate the ever-evolving landscape.
Managing a complex environment
The new digital economy is beginning to take shape. Over the next decade, the tokenisation of assets is expected to grow at a double digit CAGR. Meanwhile, according to the International Monetary Fund1, around 100 countries are exploring CBDCs at one level or another, some researching, some testing, and a few already distributing CBDCs to the public.
Explosive growth in digital assets has prompted increasing interest from corporates, but also from governments and regulators: the Monetary Authority of Singapore is ramping up its digital asset oversight efforts as it looks to review legislation, while in March this year, US President Joe Biden established a national digital asset policy focused on priorities such as financial stability and illicit finance, as well as fraud risk.
As corporates and financial institutions alike seek to chart a compliant course into the digital future, banks will prove to be vital partners.
He adds that a key area of focus is to continue to work through complex design and policy considerations. These include use cases, data privacy and economic and financial impacts.
Another important avenue is to translate the benefits of CBDCs, digital currencies and assets into tangible improvements to clients’ business processes and lifecycles.
“This could take the form of using smart contracts in programmable and contextual payments, such as with trade instruments across the supply chain lifecycle or end-to-end flows in marketplaces,” says Kai Fehr, Global Head of Trade and Working Capital.
“A further area is offering our largest multinational clients integrated liquidity management services across various CBDCs and new settlement venues,” he adds. “We are actively involved in multiple industry and central bank initiatives, especially in multi-jurisdiction arrangements, for example in Hong Kong and Singapore, as well as in the UK Treasury’s CBDC Engagement Forum.”
Creating the underpinnings of the new economy
Digital innovation doesn’t just provide new ways to make payments and to invest. Blockchain, the technology that underlies digital assets, is rapidly being leveraged to support a more inclusive economy, in which e-commerce dismantles barriers to global trade for SMEs and entrepreneurs and technology is harnessed for greater financial inclusion.
“Tokenisation could also allow more efficient trading of all types of assets on digital asset exchanges. For example, tokenising trade finance assets could lead to improved secondary liquidity, which ultimately supports the real economy and lowers the trade finance gap,” says Fehr. And by tokenising payment obligations from buyers to suppliers using blockchain technology, large corporates can gain greater visibility over their supply chains, while the long tail of the supply chain – often made up of SMEs in emerging markets – can access much needed working capital.
One of the most promising current opportunities for the financial sector is the potential of CBDCs to revolutionise international payments. While digitalisation has led to many improvements in payment processes, there are still numerous challenges with low value cross-border payments – especially inefficiencies in liquidity, FX, settlements and operations.
To process global payments, banks and payment service providers must maintain multiple nostro accounts with various banks across the globe – just so they can access different currencies. Each of these accounts is funded separately, resulting in inefficient liquidity and higher cost-of-fund. Additionally, when funds cross borders via correspondent banks, currency conversions take place, and these add high FX costs to transactions - up to 15% of the total cost.
In recent years, the volume of global cross-border payments has been increasing – primarily due to factors such as globalisation, e-commerce and a growing middle class in developing markets. While the large value cross-border payment market segment is well-covered by banks via the SWIFT-based correspondent banking network, the emerging low value cross-border payment segment – which is currently the fastest growing segment in this market – is presently costly and under-served by financial institutions.
“We see increasing demand for efficient, low-risk, instant or near-instant international payments,” adds Panaino. “Settlement and operational inefficiencies are longstanding challenges, and we are participating actively in initiatives to explore improvements and innovations that can benefit our clients - one example being our collaboration with Bank for International Settlements (BIS) and central banks in China, Hong Kong (SAR), Thailand and the United Arab Emirates in Project mBridge.”
Real solutions for the digital age
The mBridge trial platform has validated the proposition that CBDCs can substantially increase the speed of cross-border payments from multiple days to near real-time, while also reducing cost. Building on this proposition, Standard Chartered has identified and conceptualised a low-value payments business use case, which is currently under development.
Initiatives such as these can address the structural challenges faced by banks, payment service providers, businesses and consumers, while enhancing the entire payment ecosystem, enabling financial institutions to better serve the real needs of their clients.
As trusted institutions at the heart of the financial services landscape, banks are uniquely placed to serve and protect their clients amid a rapidly changing world. By bringing together regulatory alignment, risk management and a forward-thinking institutional focus, the banks of tomorrow are safe, dynamic hubs that provide growth opportunities for the digital future.
The possibilities are nearly endless: digital innovation can – and will – expand access to finance, reduce the cost of digital transactions and help more businesses to sell to the world. Innovation in banking isn’t just about tech-forward features for tech-forward companies. Instead, it’s about solving for real challenges to facilitate the economy of the future.
In which of the following areas has your firm made commitments to invest, partner or develop capabilities on?
- Digital Assets
Moving the dial on financial crime
Moving the dial on financial crime
Banks and their fintech partners share responsibility for driving risk out of the system. But how best to go about it? By taking a radical new approach, says David Howes, Global Head, Financial Crime Compliance, Conduct & Compliance Framework at Standard Chartered.
Change and risk are two sides of the same progressive coin. It’s why banks for years chose not to deal in it. But engaging in the digital economy is no longer a choice; how banks address some of the challenges it presents them with, is.
For David Howes, Global Head of Financial Crime Compliance (FCC), Conduct and Compliance Framework at Standard Chartered, ticking increasingly complex regulatory boxes in a purely rules-based system isn’t sufficient – not for the bank, the wider financial services industry, and especially not for those who suffer the very real consequences of a collective failure to stop the flow of dirty money.
It's why Standard Chartered is taking a lead role in shaping a new global,
cross-sector approach to anti-money laundering (AML). And, given the acceleration in the number of fintech partnerships, which present a whole new threat vector for regulated institutions, why Howes is keen it should influence those fintechs’ approach to risk, too.
“We have to comply with laws and regulations - we do not get to choose these. But you’d struggle to find anyone who will argue that the public and private sectors are applying resources to optimum effect and getting the results from FCC that we hoped for,” he says.
While banks are legitimately concerned about being hit with a big stick by national and international authorities, he believes too much of their focus up to now has been on process and not on results.
That countries intercept and recover less than one per cent of global illicit financial flows, according to the United Nations Office on Drugs and Crime, indicates that AML is broken. Huge investments by banks in technology and people to identify potential suspicious activity in line with anti-money laundering directives and, more recently, stringent international sanctions designed to identify the true beneficial owners of assets, means they diligently generate millions of reports, but that merely demonstrates they’re watching.
Standard Chartered is keen for banks and others to adopt a threat-based approach to compliance, meaning resource could be better deployed in identifying criminals and providing the relevant authorities with the means of pursuing them. Additional vulnerabilities created by an increasing number of players in the financial ecosystem, not all of whom are required to operate to the same compliance standards as regulated FIs, only makes the argument for such a threat-based approach – one that can be mutualised across the industry – more compelling.
Mox, Standard Chartered’s digital bank, launched in Hong Kong in 2021, has already provided such a model.
Mox started by identifying the unique threats it faced and risk-rating them. The higher and medium-ranked threats were subject to detailed mapping to identify, for example, specific threat corridors, customer segments, geography links and other important attributes. A joint team from Oliver Wyman, Financial Crime News and Mox then worked together to establish the threat relevance and exposure – for example, to the customer base, products and services offered – and the threat impact, such as the financial impact, reputational damage, and customer and investor attrition. The threat classifications went way beyond generic money laundering to rank Mox’s exposure to the specific crimes that it could facilitate, such as people trafficking and drug smuggling.
The bank then applied general, institution-wide controls as well as controls by customer lifecycle – for example, at the intersection of customer onboarding (the stage in the lifecycle) and human trafficking (the identified threat). The findings of the pilot FCC programme were outlined in a joint report, The Threat Lens – Putting The Financial Crime Threat Back Into The AML/CTF Risk Assessment.
Commenting on the pilot, Howes said: “What Mox has done is innovative in that it tried to rethink the risk analysis and say ‘what are the actual threats that we are exposed to and can we move more of our resources towards them?’. It is in line with what the Wolfsberg Group [13 global banks, including Standard Chartered, which are developing industry standards for AML] is saying on making FCC more effective, by focusing on what we can provide – useful information to relevant authorities.
“Being more threat-based in how we think about financial crime risk is absolutely something we at Standard Chartered are seeking to incorporate. We have built risk models for client risk assessment using similar tech to building a credit model, recognising that the data has to be just as clean for financial crime.
“We take variables at onboarding which give a view on where to risk-rank that client, which directly influences the due diligence we take.
“In transaction monitoring, we are focused on collecting data on investigations that we have done by thousands of analysts on millions of cases to identify the various indicators that caused them in the end to be suspicious. That leads to you producing cases that are more relevant to authorities.”
Based on the result of the Mox pilot, The Threat Lens report issued the following rallying cry to financial service providers: “While this approach was considered for new and emerging banks, e.g. Mox, the pilot could be considered by other FIs as enhancement opportunities for their existing programmes,” it said.
Wherever they are in the banks’ value chain – a neo that needs banking as a service or a fintech partner providing specific services to a bank, such as KYC and onboarding – Howes says some of the risks these newcomers present are not materially different to those that exist in the correspondent banking network. Exposure in the latter, of course, has led to widespread de-banking as FIs judged the risk that lower tier organisations presented as being too difficult to monitor. Although in Howes’ view that was a retrograde step, simply serving to make it harder to identify crime and improve compliance, he says: “As such, financial institutions are naturally reluctant to bring the same risk into the business that they have spent all this time refining out of it.”
Weaknesses among fintechs, especially in the startup phase, go beyond a lack of internal compliance expertise to specific weaknesses in aspects of their operation. That’s a particular threat in cross-border payments, including missing identity information in the payments chain, making it hard for a FI to understand their exposure to, for example, sanctioned individuals. Indeed, in the UK, the Financial Conduct Authority fired a warning shot across the bows of challengers earlier this year, highlighting inefficient transaction monitoring, lack of due diligence and poor alert management, which would all raise red flags for a banking partner.
“But there are a number of things a fintech can do to be a more credible partner to a bank or to secure banking services,” says Howes. “Take responsibility for things is the first – if you tell me the regulations under which you operate do not specifically require something relevant to managing risk, that’s not the answer I’d be looking for. You can get a culture clash between techs and banks, but remember you are dealing with a regulated party so railing against it is unlikely to be useful to you. Be honest, thoughtful and curious about what business risks you might be introducing and change your business model and products if necessary."
"Lastly, pay attention to clean data and technology stacks – capture the right data accurately right from the outset.”
Mutual trust between organisations – big, small, new and established – will be essential when it comes to figuring out the best way forward, as will a united front against financial crime. Banks, in their work with fintechs, regulators and law enforcers, must take much of the responsibility for that, says Howes, if they want to preserve the trust clients have invested in them for so long.
“The compliance mission of the banks in the past has primarily been protecting the bank from regulatory action; that’s important but it should not be the purpose. We should recognise the bigger contribution financial institutions can make to society by leading the fight against financial crime,” he says.
That clearly requires a change of attitude both inside and outside of the organisation. And the dial, he hopes, is moving in that direction.
This article was also published in Fintech Finance.