{"id":31367,"date":"2018-11-13T14:29:30","date_gmt":"2018-11-13T19:29:30","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/will-machine-learning-help-the-commonwealth-bank-of-australia-cba-avoid-the-next-banking-regulatory-crisis\/"},"modified":"2018-11-13T18:56:10","modified_gmt":"2018-11-13T23:56:10","slug":"will-machine-learning-help-the-commonwealth-bank-of-australia-avoid-the-next-banking-scandal","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/will-machine-learning-help-the-commonwealth-bank-of-australia-avoid-the-next-banking-scandal\/","title":{"rendered":"Will machine learning help the Commonwealth Bank of Australia avoid the next banking scandal?"},"content":{"rendered":"

The Commonwealth Bank of Australia (CBA) has led the Australian market in profitability, customer service and digital offerings[1]<\/a>. However, it has spectacularly failed when it has come to managing regulatory and reputational risk. In the past year, CBA faced an AUD 700 million (USD 500 million) settlement for 53,750 breaches of the Anti-Money Laundering and Counter-Terrorism Act<\/em>, as well as a scathing report from the banking regulator on its risk and regulatory practices, the early resignation of its CEO and the scrutiny of a Royal Commission[2]<\/a>[3]<\/a>. This environment is not unique to Australia with global scandals such as Wells Fargo in the US being fined for opening unauthorized accounts and Lloyds in the UK being fined for mis-selling payment protection insurance[4]<\/a>[5]<\/a>.<\/p>\n

CBA is now applying machine learning as a key method of process improvement for its regulatory risk management. CBA is not alone in the growing RegTech space, which applies technology solutions to ensure that financial services companies are able to comply with regulatory requirements as a means of process improvement[6]<\/a>. RegTech is particularly important as regulatory burden has increased in both quality and prescriptiveness[7]<\/a>. At the same time, increasing complexity in banking products and a greater focus on incentivized sales targets and cross-selling has made it more challenging to balance regulatory risk management with profitability[8]<\/a>.<\/p>\n

In the short-term, CBA has engaged in a RegTech pilot through a partnership with ING and Ascent Technology to apply machine learning and natural language processing to interpret and convert 1.5 million paragraphs of regulation into actionable tasks with 95% accuracy[9]<\/a>. If applied successfully, this will enable CBA to achieve cost savings and improve accuracy in its compliance function. CBA has identified that \u2018RegTech is a very important part of our innovation strategy\u2019[10]<\/a>. It has also committed to a broader path of collaboration, increasing its involvement with the RegTech Association in order to improve its anti-money laundering and compliance systems[11]<\/a>. More broadly, in response to the ongoing Royal Commission, it has recognized \u2018the need for significant changes, particularly to systems, processes and culture\u2019. However, CBA has not yet identified how it intends to apply machine learning and RegTech methods more broadly to manage its regulatory risk and compliance processes. Interestingly, artificial intelligence and machine learning have been key components of CBA\u2019s broader digital strategy with a chatbot \u2018Ceba\u2019 launched in early 2018[12]<\/a>. This raises a question of where CBA is focusing its growing machine learning expertise. Based on available public information, it does not appear that regulatory risk management has been CBA\u2019s primary focus when it has come to machine learning.<\/p>\n

As CBA continues expanding its RegTech focus, it has some key choices when it comes to prioritization, approach to partnerships and intensity of development. Here is my take:<\/p>\n

Prioritization<\/strong>: The Ascent pilot seems to be about cost savings \u2013 but that is not CBA\u2019s major challenge, and nor is profitability. The prudential inquiry into CBA found that \u2018CBA\u2019s continued financial success dulled the senses of the institution\u2019 and that CBA had \u2018an operational risk management framework that worked better on paper than in practice, supported by an immature and under-resourced compliance function\u2019[13]<\/a>. CBA must use its machine learning focus and expertise to identify compliance risks more quickly across different business areas. These types of solutions are already being developed elsewhere, such as IBM Surveillance Insight which can analyze internal data ranging from employee emails to trade transactions[14]<\/a>.<\/p>\n

Partnerships: <\/strong>CBA\u2019s current focus is on partnerships to develop regulatory management solutions. This makes sense in the short-term given their low capability compliance function and the large number of RegTech solutions being developed globally. However, in the medium-term the challenge will be integrating various risk management methods and tools into CBA\u2019s everyday business processes and products. This will require internal expertise at the intersection of risk management and machine learning and CBA needs to increase its investment in this capability.<\/p>\n

Intensity: <\/strong>Risk management is one of CBA\u2019s top priorities of 2018, taking up the entirety of the Chairman\u2019s letter to shareholders in the 2018 annual report[15]<\/a>. Yet, this focus has only translated into one early-stage RegTech partnership in 2018. If CBA is serious about achieving a step-change in its regulatory risk management, it needs to harness machine learning at a faster pace, testing multiple solutions internally and externally.<\/p>\n

There are many open questions for the financial services and RegTech industries. Across industries facing increasing regulation, where do you see the opportunities for machine learning to improve regulatory risk management? Could RegTech become a competitive advantage for the banks that succeed or is RegTech just becoming a standard tool that every player will adopt? (779)<\/p>\n

[1]<\/a> James Frost and James Eyers, \u201cCBA delivers blockbuster $9.9b profit,\u201d Australian Financial Review<\/em>, 9 August 2017, https:\/\/www.afr.com\/business\/banking-and-finance\/financial-services\/cba-delivers-blockbuster-99b-profit-20170808-gxryud, accessed November 2018.<\/p>\n

[2]<\/a> James Thomson and James Frost, \u201cCommonwealth Bank settles AUSTRAC case for $700m,\u201d Australian Financial Review<\/em>, 4 June 2018, https:\/\/www.afr.com\/business\/banking-and-finance\/financial-services\/commonwealth-bank-settles-austrac-case-for-700m-20180603-h10wzu, accessed November 2018.<\/p>\n

[3]<\/a> John Laker, Jullian Broadbent and Graeme Samuel, Prudential Inquiry into the Commonwealth Bank of Australia.<\/em> Australian Prudential Regulation Authority, 30 April 2018, https:\/\/www.apra.gov.au\/media-centre\/media-releases\/apra-releases-cba-prudential-inquiry-final-report-accepts-eu, accessed November 2018.<\/p>\n

[4]<\/a> Michael Corkery, \u201cWells Fargo Fined $185 Million for Fraudulently Opening Accounts,\u201d New York Times<\/em>, 8 September 2016, https:\/\/www.nytimes.com\/2016\/09\/09\/business\/dealbook\/wells-fargo-fined-for-years-of-harm-to-customers.html, accessed November 2018.<\/p>\n

[5]<\/a> Stefania Spezzati and Franz Wild. \u201cWhy U.K.’s Costliest Banking Scandal May Get Uglier,\u201d Bloomberg, 5 July 2018. https:\/\/www.bloomberg.com\/news\/articles\/2018-07-05\/why-u-k-s-costliest-banking-scandal-may-get-uglier-quicktake, accessed November 2018.<\/p>\n

[6]<\/a> Kari Larsen and Shariq Gilani, 2017, \u201cRegTech is the New Black – The Growth of RegTech Demand and Investmen,.\u201d Journal of Financial Transformation<\/em> (Capco Institute) 45: 22-29.<\/p>\n

[7]<\/a> Kari Larsen and Shariq Gilani, 2017, \u201cRegTech is the New Black – The Growth of RegTech Demand and Investmen,.\u201d Journal of Financial Transformation<\/em> (Capco Institute) 45: 22-29.<\/p>\n

[8]<\/a> Ensigh, R. \u201cWhat the Wells Fargo Cross-Selling Mess Means for Banks,\u201d Wall Street Journal<\/em>, 15 September 2016, https:\/\/www.wsj.com\/articles\/what-the-wells-fargo-cross-selling-mess-means-for-banks-1473965166, accessed November 2018.<\/p>\n

[9]<\/a> Ry Crozier, \u201cCBA uses AI to make sense of regulations,\u201d it news, 23 February 2018, https:\/\/www.itnews.com.au\/news\/cba-uses-ai-to-make-sense-of-regulations-485707, accessed November 2018.<\/p>\n

[10]<\/a> Ry Crozier, \u201cCBA uses AI to make sense of regulations,\u201d it news, 23 February 2018, https:\/\/www.itnews.com.au\/news\/cba-uses-ai-to-make-sense-of-regulations-485707, accessed November 2018.<\/p>\n

[11]<\/a> James Eyers, \u201cCBA joins regtech group to improve compliance,\u201di, 23 September 2018, https:\/\/www.afr.com\/business\/banking-and-finance\/financial-services\/cba-joins-regtech-group-to-improve-compliance-20180921-h15pdu, accessed November 2018.<\/p>\n

[12]<\/a> James Frost, \u201cCBA says artificial intelligence won\u2019t replace specialists,\u201d Australian Financial Review<\/em>, 22 January 2018, https:\/\/www.afr.com\/business\/banking-and-finance\/financial-services\/cba-says-artificial-intelligence-wont-replace-specialists-20180122-h0m6o9#ixzz58lIaU9Li, accessed November 2018.<\/p>\n

[13]<\/a> John Laker, Jullian Broadbent and Graeme Samuel, Prudential Inquiry into the Commonwealth Bank of Australia.<\/em> Australian Prudential Regulation Authority, 30 April 2018, https:\/\/www.apra.gov.au\/media-centre\/media-releases\/apra-releases-cba-prudential-inquiry-final-report-accepts-eu, accessed November 2018.<\/p>\n

[14]<\/a> April Rudin, \u201cThe Regtech Revolution: Compliance and Wealth Management in 2017,\u201d Enterprising Investor.<\/em> Charlottesville: CFA Institute, 12 January 2017. https:\/\/blogs.cfainstitute.org\/investor\/2017\/01\/12\/the-regtech-revolution-compliance-and-wealth-management-in-2017, accessed November 2018.<\/p>\n

[15]<\/a> Commonwealth Bank of Australia. 2018 Annual Report, pp. 4-6, <\/em>https:\/\/www.commbank.com.au\/content\/dam\/commbank\/about-us\/shareholders\/pdfs\/results\/fy18\/cba-annual-report-2018.pdf, accessed November 2018.<\/p>\n

Image credit: ABC News<\/p>\n","protected":false},"excerpt":{"rendered":"

Managing regulatory and reputational risk has become the top priority for the financial services industry in Australia in 2018 \u2013 so how will machine learning help?<\/p>\n","protected":false},"author":11415,"featured_media":31369,"comment_status":"open","ping_status":"closed","template":"","categories":[385,346,4602,4624,699,1832],"class_list":["post-31367","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-banking","category-machine-learning","category-natural-language-processing","category-regtech","category-regulation","category-risk-management","hck-taxonomy-organization-commonwealth-bank-of-australia","hck-taxonomy-industry-banking","hck-taxonomy-country-australia"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2018\/","yoast_head":"\nWill machine learning help the Commonwealth Bank of Australia avoid the next banking scandal? - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/will-machine-learning-help-the-commonwealth-bank-of-australia-avoid-the-next-banking-scandal\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will machine learning help the Commonwealth Bank of Australia avoid the next banking scandal? 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