Stuart Newey, Head of Client Service & Delivery at Coutts, and Mark Dabbs, Fraud Systems and Analytics Manager at Investec, explore how AI can help private wealth managers combat crime.
Most outsiders probably imagine the risk department of a private bank to be staffed by stiff-collared compliance teams who’ve only just upgraded to ballpoint from quill pens. Yet the reality couldn’t be more different. Because here is where some serious international crime-fighting takes place.
Meet the 007s of wealth management, whose high-tech mission is to protect their high-net worth individual and corporate clients from villains that are every bit as shady as Blofeld and just as slippery. They have, after all, a lot to lose: not just cash but something much more valuable – trust.
As banking becomes more instant, more convenient and more digitised, fraud has been steadily increasing. Scams take place in seconds, and the culprits slip away into the shadows so fast that law enforcement is struggling to keep up. The situation has only worsened during lockdown, so much so that experts predict that, instead of an anticipated eight per cent decrease in payments fraud in 2020, firms should now prepare for a 10-15 per cent increase.
Across all financial products, fraud rates in the UK rose by 33 per cent in April, compared with previous monthly averages, according to data collected by Experian and fraud prevention service National Hunter. And the Investment Association released figures in July that showed clients of UK investment managers had lost approximately £4million since the start of the pandemic to organised criminals who faked their products, in particular investment bonds, promoting them through hoax price comparison websites and cloning brands to produce counterfeit documentation.
Research from financial services firm Canada Life, in May, found that 5.2 million people in the UK had fallen victim to, or knew someone who had been duped by, a financial scam since the beginning of the virus outbreak. In the US, 22 per cent of Americans have reported being targeted by fraud related to COVID-19. More than $1.2million has been stolen in COVID-19-related schemes in Canada. The list goes on.
Fraud became the single biggest crime in the UK in 2019, accounting for 35 per cent of all reported incidents – but combated by less than one per cent of law enforcement officers, leading director general of the National Economic Crime Centre, Graeme Biggar, to admit to the BBC last month that the approach taken thus far has failed online banking users. He said government, industry and police need to ‘change the way we are thinking about fraud’ by putting greater emphasis on data sharing between agencies and banks, while encouraging the latter to ‘design out’ attacks.
His concern is shared by wealth management group Investec. Alarmed at the sudden spike in fraud attempts by April, it issued a detailed warning about online fraud and phishing scams, and in particular the risks associated with authorised push payments where third parties intercept emails or invoices and alter banking details to divert funds into a fraudster’s account.
“Across the banking industry, the number of fraud cases where the account holder transferred funds to an unintended recipient grew by 69 per cent within the last year and, given the new channels being used and unpatched home networks being used for corporate communication [during the pandemic], this could grow,” Investec said. It added that businesses and their financial partners should relook at the validation process to ensure accuracy and security.
We humans remain the weakest link, particularly during a stressful situation like COVID-19.
“With COVID, you’re under a stress scenario, people will either make mistakes or, because they are in a rush, will do things which are ill-advised,” says Stuart Newey, head of client service and delivery at UK-based private bank Coutts. “For example, your CEO has told you this, so, in a very hierarchical firm, you’d think ‘well, if the boss says I need to pay it, I need to pay it’.” Except, of course, it’s not the boss.
In the words of Mark Dabbs, fraud systems and analytics manager at Investec: “Traditional fraudsters are using the same fraud modus operandi, just rebranding it with COVID.”
He talks about an new industry emerging, ‘fraud as a service’, using the same technology available to financial institutions to give bad actors more sophisticated tools to improve their scams.
It’s self-evident that private wealth managers need to work harder than ever to protect their clients from harm – even as they struggle to deal with the pressures of lockdown themselves. And, in this scenario, artificial intelligence (AI) is increasingly coming to the fore, using superhuman power to scan insane amounts of data in real time for suspicious patterns of activity and alerting managers to threats. On top of that, says Newey, ‘we have to concentrate on how we protect the consumer from making ill-advised choices to start with’.
“That does require institutions to challenge their clients by asking, for example, ‘are you sure you want to make this payment?’ and not necessarily taking ‘yes’ as the right answer,” he adds. “That’s a real challenge. That’s where institutions that have long-term trust and relationships with their clients are better placed to have those conversations.”
Within private wealth, Dabbs and Newey agree that AI is a powerful tool – but only when it works alongside the human service that defines this area of banking. “We already use that [AI] technology, combined with biometrics to protect our clients,” he says. Beyond that, it helps to ‘turbocharge’ the client director or relationship manager’s dealings with individuals. The AI may say ‘look, it’s worth giving Sarah a call’, but the purpose of, and value in, a relationship manager, is that they’ll understand the soft factors, other things might’ve happened. They’ll be able to put it into context,” says Newey. It’s about creating what Dabbs describes as a ‘high-tech/high-touch’ service.
“You need to augment the two, from a machine learning perspective, with the individual, ultimately, making the call,” he says.
One area of security where AI has been transforming performance in wealth management is the process of opening an account. Famously slow, the onboarding process can take up to 12 painful weeks for some private managers. Like waiting for a bus in rural Wales or for John Wayne to finish a sentence, such delays can be a real chore for people with better things to do with their time and their money. AI has helped to lift this burden for the majority of customers.
“I think the digitisation of the journey has revolutionised the onboarding process,” says Dabbs. But even then, AI is not a one-size-fits-all solution when dealing with the world’s elite. While it has definitely sped up onboarding for some ‘vanilla’ clients – those whose source of wealth and background isn’t especially complicated – Newey says: “Firms are going to need to make sure that, for accounts they bring in with a very light KYC, they have appropriate monitoring of payment and transaction activity to make sure that, until they really get to know the client, it’s legitimate business.
“If you’re trying to onboard international clients, you’re going to find it a harder process. You’ll need to do a manual workaround.” Crime-fighting regtechs would do well to bear that in mind.
“There are many people wandering around with solutions that they think they can just plug into a private bank,” says Newey. “But It is fundamentally different to a retail bank. They need to understand that it is all about customer intimacy. We don’t just talk about the client, we’ll talk about the client’s family, in its entirety, as well as the client’s network. “So, understanding where we’re coming from is important. Also, understanding the complexity that comes with it, as mixing commercial, UK and international business creates quite a complex picture.
“If you have solutions that work in a commercial space and a retail space, and are very personalised in what they can do and built around relationship values, OK it might work. [But] the other key thing is to understand the investment and the IT infrastructure we have already got because linking systems into that is often where the biggest cost is.”
Private wealth managers want tools that enhance the premium service their clients are paying for because this will always be an exclusive people-to-people industry. For that reason, getting ahead of sophisticated scammers will take a hybrid of personal and technological expertise, with AI giving the 007s of wealth management a better chance to beat the villains… and they might even manage it without destroying an Aston Martin at the end!