How can technology address compliance challenges in the financial sector? This was the first question addressed by panelists at Elvinger Hoss Prussen’s inaugural fintech conference, held at Spuerkeess on September 17, 2024.
For Kaj Larsén, legal director and member of the management committee of Advanzia Bank, this is a “key question” that concerns large, small banks and even neobanks. The “default” approach is often to “dedicate human resources” to the problem. “But what we want to avoid is using expensive human resources for tasks with low added value,” he argued. “We really want to make sure that we’re really careful with our resources, and that will also help us become more competitive. »
“Technology can do a lot,” added co-founder and CTO of Next Gate Tech, a software-as-a-service platform that provides data management and analytics services for the funds industry. The fintech company, for example, automates repetitive processes such as data ingestion, harmonization and matching. But the hardest part may be adopting the new technology and getting used to its features, he said, emphasizing the importance of education and showing “the added value that technology can bring to this particular customer.”
Emerging technologies that have potential
When it comes to technologies that have the potential to transform compliance and risk management in the financial sector, generative AI is “the elephant in the room,” Ibisevic said. “Things that weren’t possible before become much easier to do now. » For example, before the advent of generative artificial intelligence, Next Gate Tech used “cutting edge” models to work on a project to extract data from text in PDFs. “But to be honest, the results were quite disappointing at the time.” Enter generative AI and boom. The results were much better.
Using AI can also minimize the risk of false positives, he added. When it comes to NAV (net asset value) monitoring, for example, “by adopting AI, taking into account the inherent non-linearity between different factors that may have arisen, and adopting a broader data set, we can reduce false positives.
Emerging technologies follow the legislation, Larsén said, highlighting the European Eidas regulation on electronic trust services – which involve the creation, verification or validation of electronic signatures or seals – and can help reduce risks associated with remote integration.
The introduction of central bank digital currencies (CBDCs) could also help reduce risks, Larsén argued. “I don’t think it’s a question of if it will happen, it’s just a question of when it will happen. The critical mass is there. Without going into political details surrounding the digital euro, he added that “if the digital euro is widely accepted, the risk will be significantly reduced. For what? Because all transactions will be reported in a ledger maintained by the European Central Bank. This would increase transparency and could be a “game changer”.
Fight against fraud
“For our part, the fight against money laundering is becoming increasingly important,” said Christophe Medinger, deputy head of the digitalization division at Spuerkeess. Digital fraud is on the rise and traditional methods of combating money laundering will not be enough. Fraudsters use technologies such as artificial intelligence or ChatGPT to generate programs and code to try to get ahead of security systems, or to produce fake videos aimed at tricking people. To combat this, the financial sector must complement its own measures with measures such as machine learning algorithms, he said. But it is also essential to avoid too many false positives, as this leads to additional manual work.
AI can also be used in the anti-money laundering and transaction monitoring space, noted Larsén, who said Advanzia has deployed a “powerful” tool to reduce risk called “dynamic scoring risks”. “Instead of having static rules – cash withdrawal plus high-risk countries equals success – we can have dynamic scoring models. And I think that’s really the future of transaction monitoring.
Industry and fintech can benefit from each other
Technology can help banks comply in many ways, Medinger said, especially considering they all need to comply with regulations around topics like AML, KYC and digital resilience. Working together – pooling – could be a solution that would benefit all stakeholders.
“It’s a great environment in Luxembourg,” added Larsén. “There are so many stakeholders supporting us, we have the fintech ecosystem. » But beyond that, many people come to the Grand Duchy from different places, with diverse backgrounds – and “this also creates an opportunity to bring ideas to Luxembourg”.
For Ibisevic, “fintech and industry players can benefit from each other”. Industry players “can leverage very specialized and specific technologies that are adopted in certain areas, and conversely, fintechs can learn a lot from their expertise and the long experience of these clients.” And when it comes to pooling, he added that his company tries to avoid custom development for a single client. Instead, it looks at the market as a whole and tries to come up with a more efficient way of doing tasks.
Key takeaways
To conclude the panel, participants were asked about the most important messages they wanted to convey to the public.
“We should view technology as more than just a tool to achieve compliance or solve a compliance problem,” Larsén said. “We must use it as a catalyst to turn these burdens into opportunities.” And if we do that, we can also become more competitive. »
Luxembourg is a small country, Medinger stressed, but “we must remain relevant in Europe. We must work together in the industry… and pool technological solutions together.
“Compliance, innovation and technology go hand in hand,” Ibisevic concluded, adding that technology should be seen as an opportunity. “Don’t be afraid to leverage technology. Try playing with it, experiment with it.