Elucidate, the financial crime risk scoring company, has launched a standardised, transparent product for pricing financial crime risk, which it says will provide fairness and comparability within the market.
Transactions between financial institutions are currently priced by volume, with the associated financial crime risk not bearing any influence on the price of the transactions. Originators of high-risk transactions are therefore not incentivised to improve their financial crime controls, leaving intermediaries to bear the costs of the potential risk.
Elucidate’s product, which was launched this week at the BAFT Europe Bank to Bank Forum (18 to 19 January 2022), aims to reduce financial crime by creating a standardised algorithm that the entire market can adopt, improving transparency between banks and their clients. At the same time, the product creates a shared framework to assess and monitor for improvements to reduce exposure to financial crime. The framework also ensures transactions that pose higher financial crime risks will be subject to higher fees.
Elucidate worked alongside Standard Chartered Bank to build this framework, which uses machine learning technology coupled with a bank’s own data to create a numerical financial crime risk score. The scores are then applied into a pricing algorithm to determine the price, which is then made clear to both parties in the transaction.
A clear standardisation of financial crime risk provides the financial industry with far greater accuracy in risk decision making, eliminates market inefficiencies, creates more fairness in counterparty interactions, and effectively aligns risk and return.
Founded in 2018, Elucidate has been working to improve financial crime risk transparency. It has created the industry’s only authorised financial crime benchmark, the Elucidate FinCrime Index (EFI), which is regulated by the BaFin (Germany’s Federal Financial Supervisory Authority) and ESMA (European Securities and Markets Authority).
Shane Riedel, CEO and Founder of Elucidate, said: “We know that banks are spending, on average, around 3% of revenue on managing financial risk. Some banks have even told us that 10% of staff are employed in compliance alone. That’s not sustainable.
“This product will provide financial institutions with a simple way of calculating risk scores, which will be made visible to all parties in a transaction, ultimately providing greater transparency across the market. Crucially, though, it will also allow banks to move away from manual and bespoke assessment of financial crime, which is often time and cost intensive.
"We have several thousand years of market experience showing us that the best way to manage risk is to price it correctly. This applies across the board. The closer we come to allocating the cost of financial crime risk to the point of its origin, the less risk there will be."
Francesco Miccoli, Head of Europe-Americas Correspondent Banking & Head of UK Fintech at SCB, said: “In our view, financial crime risk, like credit risk, should be accurately priced. If a financial institution carries more financial crime risk, the pricing should reflect that.
“We see financial crime risk pricing as a tool to change the commercial calculations within correspondent banking. By deploying data analysis at scale for preliminary and ongoing risk analysis, we can lower respondent acquisition and maintenance costs to a point that more commercial relationships are commercially feasible.”
About Elucidate: Elucidate (https://www.elucidate.co) is a financial crime risk quantification platform, regulated by the BaFin and ESMA, providing the market’s only authorised financial crime benchmark. From its base in Siliconallee, one of Berlin’s most diverse teams works with financial institutions and regulators with the goal of identifying, minimising, and pricing their financial crime risk exposure.
About Standard Chartered Bank: Standard Chartered Bank plc (https://www.sc.com/en/) is a British multinational banking and financial services company headquartered in London, England. It operates a network of more than 1,200 branches and outlets across more than 70 countries and employs around 87,000 people