Social Value Creation Report "Lifeline Infrastructure"
Building new trust in banks
Customer-centric financial services for all people and industries
As digital transformation progresses in a variety of fields, the governments of each country are cooperating with financial and non-financial companies to promote open APIs in banking services in order to increase the competitiveness of their financial functions. Digitalization has brought about new financial services aiming at enhanced CX (customer experience) one after another, but there are concerns that people with low digital capability may not be able to benefit from these services. Finance, which supports industry and people's lives, is an indispensable social lifeline. NEC is promoting full penetration of digital financial functions into all industries and lifestyles, in order to realize a world of "Digital Inclusion," in which everyone can benefit from technology. In this report, we introduce the trend of digitalization of banks in Japan and overseas. We also introduce NEC's thoughts, initiatives, solutions, and services for supporting the lives of people and economic growth by improving the quality and efficiency of the financial infrastructure, a lifeline for society, using cutting-edge digital technology.
Improving CX through digitalization of banks and new challenges
Open banking changes business models
The progression of the digital society has brought about a change in business models. One cause of this is the existence of the world's leading global platform companies who have entered the financial services business. They have gained the trust of customers by making full use of digital technology and providing financial services that pursue CX*1 by referencing their large customer bases. Under these circumstances, traditional banks are required to provide high-valueadded services in pursuit of CX through the use of digital technology, while also providing traditional social lifeline functions. The governments of each country are promoting open banking APIs*2 as part of policies to enhance the financial competitiveness and support the societies and industries of their nations. They are also reforming the open banking system, which forms an ecosystem with non-financial businesses and encourages the creation of new services.
New financial inclusion brought about by digitalization
Digitalization of banks brings intense competition of services for people with high digital capabilities and familiar with smart devices. This carries the risk of creating a disparity between people with high and low digital capabilities, and there is an increasing focus on digital financial inclusion*3.
For example, while some people feel that cashless services are convenient, it is also a fact that bank branches and ATMs reducing in size is a source of anxiety and inconvenience for those who want to use financial services in the physical world. Furthermore, it may be difficult for foreign workers to remit money to their home countries and for seniors to make large transfers in case where stringent counter measures against money laundering and special fraud are taken to pass FATF*4 inspection.
Financial services that are indispensable for economic activities and everyday life are a social infrastructure that must be made available for all people to use comfortably, securely and safely regardless of generation or digital capability. Building new financial structures for anyone by giving consideration to all customers' needs and feelings is a critical challenge the financial industry in the digital era will face.
- *1CX: Customer Experience
- *2API (Application Programming Interface): An interface used by software components to interact with one another.
- *3Financial Inclusion: Enabling all people effective access and use of services provided by normal financial institutions at a fair cost.
- *4FATF (Financial Action Task Force): An intergovernmental organization established in 1989 to develop international standards and for anti-money laundering and anti-terrorism financing, and examine the implementation status of these standards.
European initiatives leading open banking
Institutional reform to strengthen competitiveness promoted by the government
Open APIs are the key to open banking initiatives that aim to create new value through collaboration between banks and non-financial industries. By publishing system connection specifications as APIs to fintech companies and other external corporations that are good at pursuing CX services, the system can be connected securely without exposing customers' passwords. The use of APIs makes it easier to provide more convenient financial services.
In 2015, the EU passed PSD2*5, a directive which obligates banks and other financial institutions to provide open APIs, and put it into effect in January 2018. They established the GDPR*6 in April 2016 to strengthen personal information protection while also giving individuals authority to transfer data. The GDPR is also important in enhancing the mobility of personal data from the viewpoint of protecting personal information. Protecting and utilizing personal data is an important part of providing innovative financial services.
In the UK, four major banks account for 85% of the market share, and government-led open banking initiatives are being promoted to strengthen competitiveness and create innovation. In 2014, the UK government introduced a regulatory sandbox screening system for the purpose of developing businesses that utilize fintech. If a company passes a test enacted by the FCA*7, it is allowed to conduct demonstration experiment using a limited number of customers for a limited period of time. Based on the results of the experiment, it is determined whether that company can provide services to the general market.
Continued collaboration of financial and non-financial industries
BaaS*8 for providing banking functions to fintech companies via open APIs and challenger banks*9 with new business models are being launched in Europe and the US.
Traditional and challenger banks, BaaS platform companies that provide a basis for open banking, and fintech companies and other corporations that utilize open APIs for BaaS are active in digitalizing banks.
Traditional banks are working to gain customer trust, increase profitability, and acquire new customers by improving CX through cooperation with fintech companies. By creating ecosystems with banks, non-financial businesses can quickly introduce financial services to the market without spending too much time and money complying with the Banking Act or building banking systems.
- *5PSD2: The Second Payments Services Directive
- *6GDPR: The General Data Protection Regulation
- *7FCA: The Financial Conduct Authority
- *8BaaS (banking as a service): Provision of banking through cloud services via APIs.
- *9Challenger bank: A company that has a banking license and provides financial services for smartphones and other mobile devices. Monzo in the UK, N26 in Germany, etc.
Japan's efforts to create new financial services and solve issues
Japan rides the wave of service creation through institutional reform
Systems are also being revised and improved in Japan to promote collaboration between banks and fintech companies. With the revision of the Banking Act in May 2017, Japanese banks are now obliged to make efforts to correspond with open APIs. The government growth strategy, Future Investment Strategy 2018 states that, as of March 2018, 130 out of all 139 Japanese banks, which do not include branches of foreign banks, have announced plans to implement open APIs (the 9 banks which have not announced plans for open APIs do not offer internet banking). 122 out of the 130 banks have announced plans to implement open APIs by June 2020.
Megabanks and other advanced banks already provide services that use open APIs. They are actively creating many new services, including accounting apps, savings apps, biometric apps, private financial services that provide appropriate interest rates and upper limits based on AI scores, and new banks for digitally capable people that utilize social media.
In addition, a regulatory sandbox system was established in 2018 in accordance with the Act on Special Measures for Productivity Improvement in order to promote business activities that utilize new technologies and business models. By utilizing these systems, financial services that make use of unique information can be provided not only at major banks, but also at regional banks, contributing to the revitalization of regional economies.
The urgency of solving new issues caused by digitalization
Japan chaired the GPFI*10 meeting in 2019, and as an aging advanced nation, set the theme to "Aging and Financial Inclusion." At this meeting, eight policy priorities were established to solve issues through collaboration with the OECD*11, including responding to the needs of the elderly and protecting them from financial abuse and fraud. Of particular note are the reasons for the economic exclusion of the elderly, which include not only their decline in cognitive and physical abilities, but also their low digital and financial literacy.
There are also concerns about cyber security risks caused by collaborations between various systems and services due to the promotion of open banking.
The financial industry is a social infrastructure in which the occurrence of system failures, information leaks, and falsifications due to cyber attacks can have a profound impact on people around the world through their daily lives, economic activities, and networks. These are urgent issues that need to be solved with advanced digital technologies.
- *10GPFI: The Global Partnership for Financial Inclusion
- *11OECD: The Organisation for Economic Co-operation and Development
NEC initiatives to support increased efficiency and transformation of financial institutions
Providing rational insight through digital services
In order to be successful in the financial industry, it will be important to create services that pursue CX for people with low digital capability in the future. For that purpose, data analysis is the key. dotData Inc.*12, a company that separated from NEC, offers the innovative software dotData, which automates the data analysis process using predictive analysis automation technology, one of the cutting-edge AI technologies making up "NEC the WISE"*13. This eliminates the time and effort involved in the trial and error of data analysis, allowing users to focus on deciding business policy.
The results may also lead to insights that humans would never imagine. Sumitomo Mitsui Financial Group, Inc. has introduced dotData for the purpose of creating services that pursue CX based on operational efficiency and data analysis.
In May 2019, one year after the company's establishment, dotData Inc. was recognized worldwide as a Leader in a report on automationfocused machine learning by US research firm Forrester Research, the highest rank they offer.
Improving the accuracy of financial portfolio optimization is also expected of the financial industry.
To do so, improved computing speed and quality are required. NEC plays a leading role in the NEDO*14 research and development project on quantum annealing machines for high-efficiency, high-speed processing. The goal of this project is to realize highly efficient and precise optimization solution platforms that contribute to the advancement of efficiency and precision in social systems.
Providing platforms that support financial digitalization
NEC provides API collaboration platform services that enable financial institutions to realize open innovations not only in fintech companies, but also in various industries such as retail, transportation facilities, and public services. In addition, we have also collaborated with Sumitomo Mitsui Banking Corporation (hereinafter, SMBC), to start the business matching service Biz-Create*15. This platform can be used to search for business partners online. This service will contribute to the realization of regional revitalization by expanding business opportunities that transcend the boundaries of region and industry through collaboration between SMBC and regional financial institutions.
NEC will use AI to expand the possibilities of increasingly digitalized financial businesses through the advancement and efficiency of data utilization, such as automation of data analysis processes, API linkage, and optimization solution platforms.
- *12dotData, Inc.: A company formed from a strategic carve-out of NEC to provide data analysis software that automates data science processes.
- *13NEC the WISE is NEC's cutting-edge AI technologies, which maximizes human intellectual creativity activities. https://jpn.nec.com/ai/
- *14NEDO: New Energy and Industrial Technology Development Organization
- *15Biz-Create: https://biz-create-service.jp/
The digital trust of NEC supports secure and safe connected digital financial services
Complete identity verification online with facial recognition
Building a relationship of trust with customers through secure and safe services is increasing in importance as finance becomes more digitalized. NEC provides digital KYC*16 for financial institutions and fintech companies to perform quick and secure online identity verification when opening accounts and changing address information of users. NEC Digital KYC SDK (software development kit) complies with the revised Act on Prevention of Transfer of Criminal Proceeds*17 and FIDO*18 standards to compare a person's face with the image on their identification documents.
In addition to this facial recognition technology, which has the world's most accurate authentication*19, Digital KYC SDK uses spoofing prevention technology to detect fraudulent use of photos in identity authentication procedures, further reducing the risk of fraudulent use by third parties. It also allows users to protect their privacy by completing authentication within their smartphones, and without sending their biometrics or other data to another device.
The Digital KYC SDK is meant to improve the efficiency of identity authentication at financial institutions and increase convenience by providing rapid services, and is also used in LINE Pay eKYC.
Sharing KYC information quickly and securely across companies for connected financial services makes it possible to improve convenience for customers and efficiency of business activities. NEC collaborated with SBI Holdings, Inc. and SBI BITS to conduct a KYC business demonstration experiment using the industry's first blockchain technology together with 14 financial institutions, and confirmed the technology's feasibility.
Based on these achievements, NEC aims to build a cross-industry credit information infrastructure, taking advantage of the features of blockchain technology, which makes data tampering and data loss extremely difficult.
Advanced fraudulent remittance countermeasures through AI monitoring
As the number of people making bank transactions online has increased, fraudulent remittances for withdrawing deposits through unauthorized access have also increased, becoming a social issue. The sophistication of fraudulent remittance techniques has become a problem because of the increased risk for users and the increased burden on banks that monitor transfers 24 hours a day, 365 days a year. NEC and SBI Sumishin Net Bank, Ltd. are developing and operating a monitoring system that utilizes AI technology to improve the quality and efficiency of monitoring operations to prevent unauthorized remittance.
NEC is using facial recognition, blockchain, AI, and other cutting-edge technologies to support the formation of a secure and safe reliable infrastructure for new financial services through digitalization.
- *16KYC (Know Your Customer): Identity verification processes, such as customer identification and continuous monitoring, when opening an account at a financial institution or conducting high-risk transactions.
- *17Amendment to the Act on Prevention of Transfer of Criminal Proceeds: An amendment which revised some of the enforcement regulations of the Act on Prevention of Transfer of Criminal Proceeds and newly established a method for verifying identity online on November 30, 2018.
- *18FIDO (Fast Identity Online): The name of an alliance and the technical specification for new authentication methods to replace passwords, such as biometric authentication and other kinds of multifactor authentication.
- *19NEC has acquired the highest evaluation in face recognition technology benchmark test of the National Institute of Standards and Technology (NIST) five times in a row.
The realization of a society in which everyone will enjoy the benefits of digital technologies
A value chain connected by finance
Digital technology has the power to significantly change existing systems and common practices, which were previously taken for granted. Today, society as a whole is moving toward digitalization, creating an unstoppable wave. NEC aims to realize a world of digital inclusion, in which digital technologies penetrate every part of society, and everyone can enjoy their benefits.
To realize this goal NEC is working on NEC Value Chain Innovation to create new value by connecting people, things, and processes, reaching across the boundaries of industry. Finance in particular plays a major role as the bloodstream that connects industries, and this initiative is focused on digital finance. This goes beyond the boundaries of financial institutions and contributes to the provision of new financial services from the customer's viewpoint. NEC will also promote digital trust to realize a world in which all people and industries can use secure and safe financial services. By launching BaaS, NEC is enabling non-financial institutions to use banking functions, which financial institutions can protect the personal information stored by non-financial institutions and analyze personal data held by security. NEC aims to play a role in connecting financial and non-financial institutions in order to revitalize the provision of new services tailored to individuals.
Cooperating with various industries to realize digital inclusion
In order to realize digital inclusion in finance, in addition to providing their self-developed advanced digital technology, it is essential for NEC to pursue CX that satisfies everyone by cooperating with various industries that have contact points with NEC's customers. NEC started a working group in November 2018 that has been discussing the new economic zone known as the "API economy," which was created by connecting different industries. NEC also hosts the API Economy Initiative Forum to promote crossindustrial digital innovation using open APIs. NEC has already started efforts to deliver new financial services from the customer's viewpoint for all people and industries based on the reliability built upon co-creation with various industries.
We welcome your comments and questions concerning the content of this report and initiatives by NEC.
(February 18, 2020)