Fighting back after Bangladeshi hack

BY Richard Summerfield

The Bangladeshi banking hack, which saw $81m stolen by cyber criminals in February, has caused the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to issue a statement announcing the creation of a new five point security plan which will be released this week.

SWIFT’s secure messaging service is, in many ways, the glue that binds much of the global international banking system together. It allows banks to communicate with one another, sending payment instructions back and forth. However, the service acted as the backdoor for criminals to carry out the Bangladeshi theft. Via a number of coordinated cyber attacks, criminals broke into the messaging service, hijacked the system and redirected payments for their own ends.

Worryingly for both SWIFT and the global financial system, the Bangladeshi hack is not an isolated incident. In Ecudaor in 2015, a similar attack saw cyber thieves take more than $12m. An attack on Vietnam’s Tien Phong Bank, which was unsuccessful, has also recently come to light. It appears that these three publicised attacks may just be the tip of the iceberg.

Gottfried Leibbrandt, SWIFT’s chief executive, told an audience at the European Financial Services Conference in Brussels that “The Bangladesh fraud is not an isolated incident: we are aware of at least two, but possibly more, other cases where fraudsters used the same modus operandi, albeit without the spectacular amounts. The banks were compromised, credentials to payment generation systems were obtained to send fraudulent payments and the statements/confirmations from their counterparties were obfuscated."

In response to the hack, SWIFT will introduce certification requirements for vendors that help some banks connect to the network and use pattern recognition to identify suspicious behaviour.

In light of the reported – and unreported - cases SWIFT has called on the wider banking sector to do more to counteract cyber theft. It reiterated that while the company has a key role to play, it is not a regulator. "SWIFT is not all-powerful, we are not a regulator and we are not a policeman," said Mr Leibbrandt.

SWIFT’s response to these hacks may help shape the future of global banking.

News: SWIFT to unveil new security plan after hackers' heists

Peer-to-peer evolution

BY Richard Summerfield

Peer-to-peer lending has, over the course of the last decade, established itself as one of the fastest growing areas of FinTech; however, the process has also evolved into the increasingly popular marketplace lending. 

It is important to note that today’s marketplace lending has gone beyond merely matching lenders to borrowers (although this type of peer-to-peer lending is still popular in a number of markets, chief among which is China). Instead, marketplace lending has become, according to a new report from PwC, a “broad range of financing activities that cross asset classes and investor types”. The report, 'From idea to innovative market leader: A roadmap for sustainable marketplace lending growth', also notes that “marketplace lending has become a viable business with enough promise that many traditional financial institutions big and small have taken notice and are beginning to actively respond".

The evolution of marketplace lending has been swift. Marketplace lenders have evolved from merely offering unsecured consumer and small business loans and are now able to provide new forms of innovation well beyond their traditional lending markets.

PwC classifies marketplace lenders as any non-bank organisation that is primarily a digital operation. Marketplace lenders are generally unfettered by a past of traditional banking and are typified by their dynamism and agility, particularly compared to their traditional peer-to-peer rivals.

Marketplace lenders, according to the report, usually progress through a four-stage roadmap which consists of: (i) building a foundation; (ii) refining their core lending business; (iii) expanding and innovating; and (iv) looking beyond core lending.

However, as they progress through this framework, it is imperative that companies be mindful of the risks inherent in operating in the marketplace lending space. Companies face myriad risks if they do not keep refining their business and expanding and innovating continuously. Given how quickly the market moves, new platforms are always looking to emerge and disrupt incumbent businesses with even newer technology and innovations. If companies are not careful, the disrupters can quickly become the disrupted.

Report: From idea to innovative market leader: A roadmap for sustainable marketplace lending growth

US online alternative finance market jumps 200 percent in 12 months confirms new report

BY Fraser Tennant

The US online alternative finance market generated more than $36bn in funding in 2015 - an increase of more than 200 percent - according to a report published this week by KPMG, the Cambridge Centre for Alternative Finance and the Polsky Center at the Chicago Booth School of Business.

In ‘Breaking New Ground: The Americas Alternative Finance Benchmarking Report’, researchers have analysed online alternative finance activity across the Americas, exploring the impact of online alternative finance activity on the marketplace lending space and how online unsecured lending has rattled the banking world.

Among the report’s key findings is that financial technology (FinTech) has exploded in just two years, from a total market size of $4.5bn in 2013 to $36.5bn in 2015 – with the US making up 99 percent of this total. US businesses are also increasingly getting involved in alternative finance, to the extent of $6.8bn in 2015 alone, as compared to the 2013/2014 total of $10bn.

Furthermore, this level of growth is only expected to accelerate as disruptive new FinTech companies emerge to transform the landscape of the banking industry.

"The emergence of new FinTech companies will continue to transform the financial services sector," said Fiona Grandi, national leader for FinTech at KPMG LLP. "The pace of disruption is sure to accelerate, forging the need and appetite for collaboration among incumbents and non-bank innovators."

The report also points to several game-changing drivers of transformation that are impacting the banking industry, including: (i) speed: the use of algorithmic technology, credit decisions and underwriting now takes minutes, not days; (ii) transparency: investors and borrowers alike gain visibility into the loan portfolios, including risks and rewards; (iii) customer-centric: platforms bring the ‘brick and mortar’ branch into the on-demand and mobile application generation; and (iv) data: platforms have re-engineered the definition of credit worthiness, with FICO still being a factor, but no longer the only factor.

“These changes are permanent benchmarks that banks must now rise up to meet,” added Ms Grandi. “You may argue whether today’s unicorns will be here tomorrow; however, the shift towards the digital bank is indisputable.”

Report: Breaking New Ground - The Americas Alternative Finance Benchmarking Report

Optimism has fallen: new survey highlights sharp slump in financial services sentiment

BY Fraser Tennant

Optimism in the financial services sector has slumped alarmingly in the past five years, with firms citing market instability, sector competition and macroeconomic uncertainty as their top three challenges, according to the new CBI/PwC Financial Services Survey published this week.

The survey, a quarterly analysis of 104 financial services firms, reveals that banking and investment management respondents in particular had seen the sharpest slump in sentiment, while optimism across building societies and in the insurance sector was found to be broadly flat.

Drilling down, the survey shows that optimism in the financial services sector has fallen at its fastest pace for over four years, with 14 percent of firms more optimistic, but 35 percent less so, giving a balance of minus 21 percent. In comparison, the balance was 24 percent in December 2011.

“Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services,” said Rain Newton-Smith, the director for economics at the CBI. “As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.

“Investment intentions for IT remain resilient, but spending plans are being scaled back in other areas. Investments are increasingly motivated by the need to promote efficiency, while uncertainty about demand appears to be holding additional investment spending back.”

However, despite the findings, the survey does indicate that business volumes have continued to expand at a solid pace, and profitability has improved, albeit at the slowest pace for two years. Overall, business volumes rose at a decent pace, with 44 percent of firms stating that volumes were up, 18 percent saying they were down, giving a balance of +26 percent.

The survey also notes an increase in staffing levels in financial services during the last quarter, though this uptick is expected to flatline in the next three months, with insurance and building society sector staff increases being offset by losses within the banking fraternity.

“The lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective - no easy task in such an unpredictable climate,” said Kevin Burrowes, UK financial services leader at PwC. “Despite the pessimistic mood in the sector, it is very encouraging to see that many financial services organisations are planning to up their game around talent attraction and diversity."

News: ‘Perfect storm’ of events dampens optimism among financial services firms

Global investment in FinTech to top $150bn within 5 years claims new report

BY Fraser Tennant

Global investment in FinTech is set to top $150bn over the next five years, putting one in four financial services (FS) companies potentially at risk, according to a report published this week by PwC.

The report, ‘Blurred Lines: How FinTech is shaping Financial Services’, is based on a survey of 544 respondents across 46 countries and examines the development of new financial services sector technologies and their potential impact on the FS market.

Pointedly, 83 percent of survey respondents said they felt at risk of losing some of their business to standalone FinTech firms, with 67 percent citing pressure on margins as being the top threat to business, followed by loss of market share (59 percent).

In terms of the relationship between FS firms and FinTech companies, while the report notes that joint partnerships are “the most common way” in which collaboration takes place, it also makes clear that there are particular challenges to overcome. Chief among these are IT security, regulatory uncertainty and differences in business models.

“Given how fast technology is changing and lines are blurring, no business can afford to rest on its laurels,” said Steve Davies, EMEA FinTech leader at PwC. “As competition hots up, the result will be a reduction in margins and a loss of market share for traditional financial institutions. Those who do not act now are at risk of falling behind as FinTech changes the industry from the outside. Incumbents cannot afford to ignore this trend. Nevertheless, our survey shows that 25 percent of firms currently have no interaction at all with FinTech companies.”

The PwC report also identifies the distributed ledger technology Blockchain as being the next evolution in the FinTech story, with huge cost savings and improvements in transparency being real possibilities – a “once-in-a-lifetime opportunity”, according to Mr Davies. Testament to this belief is PwC’s identification of more than 700 companies that have recently entered this space.

Mr Davies concluded: “In the past, financial services companies have provided invaluable services to clients by acting as intermediaries in the system. Their functions are now increasingly being usurped by technology-driven business models. Before these traditional intermediary roles become obsolete, firms need to wake up to the once in a generation opportunity provided by this changing financial landscape.”

Report: Blurred Lines: How FinTech is shaping Financial Services