How Western Union is digitizing a 166-year-old business

Western Union

As young companies like TransferWise and WorldRemit move into the remittances arena, Western Union is working to maintain its dominant position.

As tech companies, these younger companies are often able to innovate faster because they aren’t subject to the intense regulatory scrutiny that slows down large institutions like Western Union — it’s one reason legacy and startup firms have begun various partnerships with each other. Western Union, for example, is running a pilot for cross-border settlements with Ripple and has partnerships with messaging platforms Viber and WeChat. (Incidentally, Ant Financial has bid $1.2 billion to acquire Western Union competitor MoneyGram.)

These partnerships should bring more value to customers, but Western Union also has compliance officers to please. So its also working on technology solutions internally to help strengthen security and reduce fraud, which pair data with biometric capabilities, a global identity system and “polymorphic” technologies that try to fake out automated attacks.

“We’ve built our foundation on big data technology,” said David Thompson, Western Union’s chief information officer. “We do a real time risk assessment of every transaction in real time… this allows us to take a lot of data elements where we make a decision on the transaction for risk.”

Western Union has built a global presence based on the ability to move money to and from almost anywhere in the physical world, but like most financial firms, how it handles customer data will have a big effect on its place in the digital world. There’s an overflow of customer information floating around the Internet and every trace of it is vulnerable to online attackers with the motivation to steal people’s identity and use it to commit financial fraud. It’s one reason digital identity has become such a hot topic in the financial world, where fraud is becoming more sophisticated with the financial systems themselves.

“You might have many different personas but from a compliance perspective we have to view you as ‘who you truly are,’” Thompson said. “The compliance systems need to know you’re one, individual human.”

Western Union processes 30 transactions per second, to which it must apply hundreds of compliance and risk rules, using a concept it calls Galactic ID. At different points in time, users can register at different parts of the site as different personas — like students or small businesses. Western Union snaps that information together through the elements the customer provides, like her name, birthday, address, serial number from the computer or phone on which she registered.

“If you change any type of data element we snap you back to your Galactic ID, and if we see you trying to use data elements to try to adjust your ID, the compliance officers can very quickly see [it],” Thompson said.

He wouldn’t comment on how Western Union might use customer data for a future use case. Right now, it’s focused on security and compliance.

Whereas some companies try to minimize the amount of data that’s transacted, Western Union is still collecting data and using polymorphic technologies to block hackers out of its system. The idea is that an attacker could program a bot to try to enter an application or financial transaction — it would tell the bot how many fields there are to complete and have a trove of stolen credentials to try to throw at it, to try to gain access to your application, or fund a transaction.

“When you have a bot attacking app or infrastructure, our app is constantly morphing itself so the bots can’t pick out certain fields, because 10 seconds later those fields appear in a different way,” Thompson said.

Western Union is also tying that concept it with biometrics capability. Biometrics are becoming more widely used for authentication in the developed world — customers can unlock their phones, pay for purchases or log into apps by pressing their fingerprint against their phones. But in more developing countries — like India, the Philippines and others in which Western Union operates — biometrics are being tied to national identity schemes, where governments register citizens’ fingerprints to their IDs.

“They’re opening up the system to financial services so if you walk into one of our retail locations you can put your thumb on an identity plate, it will bring up your ID and you can validate a transaction,” Thompson explained. “We’re trying to buy into that very quickly. It helps us keep folks out of our network that are blocked by that local government, that can be identified as a criminal that shouldn’t be pricing, or are on a sanctions list.”

If compliance kills, will AI come to the rescue?

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With every financial crisis, a backlash of regulation ensues. This is especially true for the last financial crisis and the Dodd-Frank Act which followed, considered by many as the most comprehensive financial reform since the Great Depression.

Over 400 new rules were created as part of DFA, including the creation of a new regulator, the Consumer Financial Protection Bureau.

With each wave of regulation, banks’ burden of compliance increases. According to KPMG’s 2016 Regional and Community Banking Industry Outlook Survey, 47 percent of banks estimate the cost of compliance between 11-20 percent of operating costs, a 14 point increase from 2014.

Through small banks have received accommodations in recent major rules, they are consistently exiting the game, mostly through M&A, according to a Congressional Research Service paper on regulation effect on small banks.

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The baking game is getting harder for smaller fish.

Dale Wilson, CEO of First State Bank in San Diego, Texas, explained this vividly in his testimony to the Financial Services Committee on Dodd-Frank. “During the last decade, the regulatory burden for community banks has multiplied tenfold,” he said. “Since the passage of Dodd-Frank there are 80 fewer Texas banks. These banks didn’t fail…. [they] could not maintain profitability with regulatory cost increasing between 50-200 percent.”

In some aspects, regulation costs hit larger banks harder, but they have the resources to sustain it.

Major ongoing regulatory concerns for banks include Anti-Money Laundering investigations, or Know Your Customer rules, which require banks to gather and infer more information about customers, to determine the risk in onboarding new clients. Banks are also subject to regular compliance reporting and periodic stress tests that check their ability to sustain a crisis.

To comply with onboarding regulation, some banks employ a compliance outsourcing company in a low cost location, where an  army of people compare documents in a mostly manual process. In recent years, more financial firms are using artificial intelligence, machine learning and advanced rules to automate large portions of this process.

By automating the process, banks can achieve an order of magnitude change in spending, said Michael Henry, general manager for KPMG’s global automated platform business for compliance and regulatory reporting. Streamlining the investigation process with software that uses some form of artificial intelligence increases the productivity of compliance officers by about 65 percent, according to Geri-Lynn Clark of NextAngles. Such software can process a large number of cases, elevating harder ones to humans, thus achieving significant savings in man hours. One client Henry worked with was able to release 300 people after deploying such a platform.

New AI enables software to be more agile and flexible to adapt to the changing regulatory environment, rather than being a specific solution to a specific regulation. KPMG’s Henry envisions the future of compliance activities as a “cold, dark room”, containing just one big computer that can produce any report on demand.

Though it might be too late for some smaller banks that were forced to shut down by the burden of compliance costs, big banks with shrinking margins will certainly benefit from new technology.

Photo credit: Steven-L-Johnson via Visual Hunt / CC BY