UBS Wealth Management is embarking on a proof-of-concept project with Singapore-based FinChat meant to bring relationship managers’ communications with customers over messaging apps into compliance.
Regulation, particularly Europe’s MIFID 2, which goes live in January 2018, makes it difficult for bank employees to have any kind of external or official communication that can’t be recorded and reviewed by compliance officers.
MIFID 2 will make explicit the need that any communication with a customer via messaging apps such as WhatsApp or WeChat must be subject to recording and compliance checks, the same as emails and phone calls already are.
Right now, when a rich customer requests a relationship manager to take a conversation onto a messaging app, the RM must explain why they can’t, says Ketan Samani, chief digital officer for Asia-Pacific at UBS. It’s awkward having to decline a customer’s request.
This lead the firm in late 2017 to look for ways to enable the recording of communications via third-party messaging platforms, and the means for compliance teams to keep an eye on them, he says.
“The established vendors didn’t have a solution,” Samani told DigFin, hence the search for fintech startups. There weren’t many choices in the market. “We found two, did an assessment, and grew confident that we could work with FinChat for a full-scale PoC.”
Making the selection
Bill Eng, co-founder of FinChat (along with CTO Arjun Singh), showed DigFin a demo of how the service works. It’s straightforward. FinChat records a WeChat, WhatsApp, Line or other message on a R.M.’s phone and downloads it to a bank’s server, where compliance officers can monitor it.
Samani says UBS decided to engage FinChat for a PoC because it believes the technology can scale to multiple markets, starting with test markets in Asia before expanding across both Asia Pacific and Europe.
It also liked the startup’s flexibility, eagerness to design a solution with UBS’s input, and its agility and speed. The PoC will occur within UBS’s sandbox and should take no more than two or three months to confirm it is ready to be deployed – or it isn’t actually going to work.
But why work with a fintech at all? Why not reach out directly to the message platforms themselves, such as Facebook and Tencent, the owners of WhatsApp and WeChat?
Samani says the platform owners vary in how much they are willing to adapt their products for the likes of a bank. WeChat comes with open APIs, allowing some degree of customization, but not enough; and WhatsApp doesn’t do this at all.
Is UBS working with these platform providers, though? Samani declined to comment.
Everybody’s doing it
Two trends are driving the need to put cell phone use into compliance, Eng says.
First, bad apples at financial institutions commit fraud on their phones exactly because they haven’t been monitored like voice and email. Many companies prefer to let their employees use personal devices for official communication. Misconduct in relation to high-profile cases of LIBOR and foreign-exchange market manipulation was done via messages, not over office emails or phones, Eng says.
Second, clients want to use their messaging apps. That’s why they are requesting R.M.s to move conversations that way. Financial institutions try to get dialogue onto proprietary apps, but customers aren’t interested: rich people in Asia tend to have five or six private banks, not to mention relations with insurers or fund managers.
And culturally, in Asia’s emerging markets, people went digital on their smartphones, not on desktops: email is what people in the West use, Eng says.
Samani, not commenting directly on issues of fraud, acknowledges that on-boarding a solution such as FinChat’s is about reducing risk. It’s not a cost-cutting measure.
But there’s potentially a revenue-growth side to the deal as well.
Eng says few banks are prepared to meet MIFID 2’s requirements on time. Once the law kicks in, private banks cannot use messaging apps in Europe if they aren’t in compliance. (UBS says its R.M.s now decline customer requests to communicate via such apps, but it is likely that some financial institutions look the other way: the legality of the practice varies by jurisdiction, and most countries’ laws haven’t kept pace with technological developments.)
“Come January, only one or two banks will be compliant-ready with our solution,” Eng said. “Imagine the impact on those banks that are left out, as their rivals are free to reach out to millennials,” those customers most likely to prefer app-based communications.
Samani says the bank has also been liaising with regulators about the PoC. Regulators are keen to see effective compliance take hold. “If we can crack it, other banks will follow,” he said.
FinChat past and future
FinChat is a young company, with only 10 employees. Eng has a military background. He served in communications for the Singaporean air force, and then joined the defense ministry’s research labs to work on information security. That experience provided the basic workings for what would become FinChat.
Eng left the military and made some money shorting stocks in 2008. “I thought I was a financial genius with that one bet,” he said, but then couldn’t repeat the success and decided he wasn’t a financial genius after all. But the money from trading funded FinChat, which he and Singh set up in 2015 and registered in Singapore in December 2016.
He would not detail revenue details but says the typical software-as-a-service model charges customers $20 to $50 per month per user. For FinChat, getting scale with some big banks is important to survive, before larger, traditional tech vendors replicate the product. (Although down the road these could also acquire the company.)
Eng says the next step could be using artificial intelligence to assist compliance departments with monitoring all of the messages being piped into the bank’s server. FinChat doesn’t see any of these messages. But it could develop simple, open-source A.I. tools to provide alerts, such as if a bank or customer suggests taking a conversation offline, or other red flags. Or a bank could develop such a service itself.