How Banks Can Walk the Line Between Digital Transformation and Risk

As digital transformation sweeps through all areas of peoples’ lives, smart banks are recognizing that they too must transform or be left disastrously behind. But change, however critical, must always be balanced against its inherent risk. What does it mean to manage risk while functioning as a true digital bank?

As organizations try to anticipate the innovations of the coming decade, they’re facing a combination of major landscape shifts.

Changing customer behavior

We’re doing things unimaginable just 10 years ago, like applying for a mortgage on our phones. As customers, we want an economy that’s like everything else in our lives: frictionless, on-demand, and fast. Banks are clamoring to meet these demands by focusing on experience, so they can capture more users and capitalize on the customer journey with digital sales and personalized cross-sells. Globally, there will be new dynamics in payments.

Changing competitive landscape

At the same time, banks are trying to out-maneuver the competition over the next 10 years, and that competition is changing rapidly. Challenger banks are starting retail banks from scratch, which gives them the opportunity to architect themselves from the ground up using the most current technology. Also entering the space are non-traditional financial institutions who have already “figured out” user experience (e.g. Google, Apple, Samsung, and Facebook).

Commerce that’s more and more open, digital, and fast

In Europe, open banking is accelerating the rate of change by enabling third party innovation and new partnerships. Everywhere, the rise of digital commerce has meant the proliferation of channels, payments types, and pores for risk. Meanwhile, instant payments around the globe are forcing banks to completely rethink the workings of their business, from looking at vast quantities of transactions in thousandths of a second, to managing the existing compliance requirements at a new velocity.

Infrastructure decision-sets

Banks are making difficult decisions about whether to upgrade legacy Internet-era systems (e.g. RS/6000, AS/400, HP-UX) or replace them by migrating onto current, AI-era systems. The platforms in question are enormous, and they require strong risk mitigation to protect them in order to handle huge volumes of data in extreme detail and reliability, all without adding friction to authentication and transaction processes.

A crisis of fraud

As businesses expand into new business lines, use cases and geographies, they are encountering new waves of fraud in never-before-seen patterns. For example, one of Feedzai’s customers, prior to deploying us, opened a new channel and immediately encountered a fraud rate of 33%. No business can sustain a fraud rate like this. Many banks are finding that fraud is evolving faster than they can adapt, without the help of the right partner. (Today our customer’s fraud rate is at less than 0.5%.)

Each of these shifts represents tremendous opportunities, but also potential threats. For example, banks in Europe can greet PSD2 as an opportunity to develop new products and services. But if they fail to engage customers with great experiences and lose customer trust, they could lose their financial management businesses to third parties. At the same time, banks under PSD2 will be faced with fraud in unknown patterns due to the multiplying attack vectors opened up by APIs.

In another example of the trade-off between digital transformation threat and opportunity, banks can be tempted to double down on their significant legacy investments, only to find that these systems cannot adapt to high velocity fraud attacks at high volumes.

Another example: banks are seeking to grow their digital channels, onboard customers faster, and reduce friction, but this digital growth increases the risk of doing business with the unknown entity on the other side of the device.

This is where machine learning becomes critical, by leveraging vast amounts of data to monitor hypergranular baselines for normal behavior (what we at Feedzai call “Segment-of-One profiles”).

With all the risk that attends every effort at digital transformation, it’s no wonder that banks often don’t know where to start. This year, the Boston Consulting Group surveyed corporate banking executives globally. 86% agreed that digitization will fundamentally change the competitive landscape, and the economics of corporate banking business models. However, only 19% agreed that their organization has a clear digital strategy. A further 86% agreed that their banking technology infrastructure was a hindrance to quickly enabling digital customer interactions.

What this data demonstrates is a strong internal conflict at banks. They recognize the urgency of digital transformation, but they don’t know how to get there. That’s why at Feedzai, we believe that an agile, AI-enabled platform for fighting fraud is about so much more than just fighting fraud. A bank needs a fraud prevention partner that can rapidly confront attacks as they change shape, come at high velocities, and in enterprise scales, so a business can mitigate risk in a way that frees it to turn its focus away from risk and toward transformation.

Phong Rock

Phong Rock

SVP of SalesFeedzai
Phong Rock