With a new year ahead, it’s time for financial services to pause, take stock of the “new normal,” and plan a path forward. COVID-19 forced nearly every industry to adapt to a new reality, and the financial services industry was no exception. Consumer habits shifted drastically. Suddenly, many people started working from home. Employee and customer needs changed. Adaptability was a necessity.
Deloitte emphasizes that going forward, financial services will need to have “greater focus on agility and efficiency, flattening hierarchies, speeding up decision-making, empowering staff, creating flexible work environments.” Everything needs to be reimagined: talent retention, data privacy, social equity, the customer and employee experience, and more. 2021 is going to be the year when the financial services industry reckons with how these changes will play out, impacting business operations, processes, new technologies, and, of course, new regulations. The acceleration in digital transformation brought on by the pandemic is now a force to further embrace.
Here’s my take on some of the trends specific to the impact that data, analytics and AI/ML will have as we look at the year ahead.
Trend #1: The Crossroads of Risk Management and Emerging Technology
One shift the financial services industry will have to come to terms with is the fact that 2020 may have made risk management models of the past outdated or obsolete, particularly credit risk models. Artificial intelligence and machine learning (AI/ML) will be central to risk modeling in 2021 and the future. The new reality requires financial institutions to update and develop new AI/ML models, tapping into expanded, real-time or alternative data that provides insights into this new and evolving environment.
There are a range of options financial institutions can explore to address some of the challenges to risk management. Chief Risk Officers should rethink their lines of defense, embedding stress testing across all lines of business, and embrace automated systems capable of running hundreds of dynamic stress testing scenarios. It’s an appropriate time to assess building out a risk transformation platform that is flexible and extensible to support these dynamic times. By rethinking risk management with alternative data, real-time data and AI/ML, financial services institutions can increase the efficiency and effectiveness of risk management.
Trend #2: The Customer Experience: All-in on Personalized, Digital-first Experiences
The COVID-19 crisis forced the use of digital channels like never before. By taking a digital-first approach, many banks found an opportunity to tailor their product and services to customers. These banks are now using advanced data analytics and artificial intelligence technology to offer a more personalized, customer-first experience.
Not only can this approach help organizations promote their products, it can offer a 24/7, one-touch experience for customers. AI/ML technology can help banks to strengthen relationships with customers on the front end, for instance by recreating live conversations with chatbots and voice assistants. To compete effectively, banks need to adapt an experience-first (not product) approach. Not only can it boost revenue through personalized services to customers, it can help uncover new opportunities with the vast amount of data uncovered. This will only lead to more personalized experiences for the customer.
Trend #3: Fighting Fraud with Data and Machine Learning
Fraud prevention is another area where the financial services industry will benefit from leveraging real-time data and machine learning. The COVID-19 crisis was a breeding ground for fraud. Criminals exploited the health threat with a variety of scams (including vaccine fraud schemes, cryptocurrency fraud, and unsolicited calls and emails claiming to be IRS and Treasury employees). According to the September 2020 benchmarking report conducted by the Association of Certified Fraud Examiners (ACFE) in response to the coronavirus, 68% of respondents observed an increase in payment fraud schemes (vs. 60% in May) and 85% anticipate a further increase over the next year.
As digital interactions increase and new payment models emerge, so will new varieties of financial crime. Artificial intelligence can help increase the effectiveness and efficiency of financial crime investigations. Financial institutions can improve efficiency by redirecting their manual efforts to the most suspicious activities.
Trend #4: Cloud as a Means to Accelerate and Scale While Reducing Costs
Cloud adoption projects are likely to accelerate in 2021 as a cloud environment enables financial services to rapidly and cost-effectively implement advanced analytics and automation in support of the aforementioned initiatives.
Historically, the financial services industry has resisted cloud architecture because of concerns about security and compliance. However; advances in security have mitigated these risks. For example, Cloudera offers the Shared Data Experience (SDX) to manage security consistently across environments. (and I’ll happily discuss Cloudera’s Shared Data Experience – SDX – specific to this concern). Whether the cloud is used as a sandbox for testing/modelling or a production environment, the speed and scalability of the cloud is proving an important tool for financial institutions.
It’s critical for business leaders today to think about how to leverage cloud computing and how it can extend their innovation and business efficiency capabilities.
Of course, not all workloads will be suitable or approved for the cloud. On-premise and private clouds will continue to have their place. Here’s where multi-cloud or hybrid cloud environments make sense. There is tremendous flexibility available and the corresponding security to align with the preferred environments.
Trend #5: Regulation and Data Privacy
The adoption of new digital technologies means there’s a treasure trove of data moving online and now available via the cloud. As data and analytics keep expanding, so do the regulations surrounding customer privacy and rights.
Data privacy has become a priority on a global level. In addition to the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), other bills are being introduced, like the Digital Charter Implementation Act (DCIA) in Canada, which we wrote about recently, and the Asia Pacific Economic Cooperation (APEC) Cross Border Privacy Rules (CBPR). Each new regulation adds a layer of protection, but also adds complexity.
The financial services industry needs to be able to easily identify and manage sensitive data and address regulatory requirements. That can only be done effectively with unified, platform-wide operations, including data classification, lineage, modelling, and auditing.
The path ahead offers many opportunities for efficiency, innovation and growth. The financial services industry has been catapulted ahead into its digital future. Now it’s time to continue the journey by embracing new technologies, data and analytics that can help improve the customer experience, reduce risk, fight financial crime and drive operational efficiencies.
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