On Digital labor: Technology, Challenges and Opportunities. Interview with Michael Henry
“Digital labor is the name for a new class of tools that can automate routine cognitive tasks. The benefits of automation are similar to previous waves. Many years ago I helped automate a reconciliation function for a large asset manager. Humans took authorization reports from their investment control system and matched them against the confirmations coming from their counterparts. This was a terrible job, and luckily no one does this anymore.
Digital labor has the potential to improve the financial services sector by improving compliance, providing more analytics for risk and control functions, and improving efficiency.”–Michael Henry
I have interviewed Michael Henry, Principal at KPMG LLP. In the interview we covered the challenges faced by financial institutions due to existing regulations standards, KPMG`s solution to automate the onboarding process for their clients, and the potential impact of Digital labor for the financial services sector.
Q1. The Organisation for Economic Co-operation and Development (OECD) proposed a Common Reporting Standard (CRS) for the Automatic Exchange of Information (AEOI) that implies a significant increase in the customer due diligence and reporting obligations of financial institutions across the world. What is the implication for your clients?
Michael Henry: The new reporting requirement will require financial institutions to collect and examine more information about their clients for the purposes of tax withholding and reporting. Banks and other regulated institutions will have to examine information from their clients to make sure they are reporting their true residence for tax purposes. This is similar to the US Internal Revenue Service’s FATCA requirements. And like FATCA, many banks will respond by asking for more documentation from their clients and adding staff to perform due diligence on that documentation.
Q2. Specifically, what is “client on boarding”? How is it normally implemented by large financial institutions?
Michael Henry: Client on boarding refers to the series of processes that a financial institution undergoes to determine whether or not it should move forward with conducting or renewing business with a given customer.
The term is inclusive of the underlying regulatory and compliance practices governed by anti-money laundering (AML) and know-your-customer (KYC) rules.
Many large financial institutions deploy thousands of staff, often in low cost offshore locations to perform this function. These staff are usually equipped with basic workflow and data management technology. At Tier 1 organizations this can cost hundreds of millions of dollars annually while pinning their reputations on the shoulders of junior resources making subjective compliance policy interpretations.
For this basic client identification and validation process, one of our clients employs thousands of people in an offshore location. Because this work is boring and repetitive, the client tells us that the attrition rate is more than 10% per month. This presents an enormous risk to the business, as banks entrust their client experience, business results, and reputations to cheap clerical labor that likely joined the bank only a few months ago.
Q3. What are the typical problems?
Michael Henry: The bank must collect information to identify the client and determine the risk that the client will engage in some kind of unlawful activity. To perform this function, the bank must process a large number of data that enter the bank electronically, or through documents. Reading and interpreting documents and trying to apply complex compliance rules using manual processes is time-consuming, error-prone, and expensive.
Technology – Workflow, case management, relational databases, and imaging technologies while mature and effective, still require human beings to read, transcribe, and interpret data.
Inconsistency – Human operators interpret complex decision-trees of rules. The risk of subjectivity grows with the size of the operation.
Accuracy – The majority of today’s onboarding representatives execute what amount to “stare and compare” and “stare, copy and enter” processes. Over the course of a business day in which hundreds of pages or documents will be read and thousands of keystrokes completed, it is inevitable that operator errors will occur.
Q4. You have worked on a solution as a service to automate the onboarding process for your clients. Can you explain in a nutshell how did you do it?
Michael Henry: The solution is comprised of multiple digital labor components to read documents and apply policy rules by machines instead of people.
Humans focus on exceptions, i.e., cases which really require human judgment. Because the exception rates are low, much of the activity becomes straight-through.
The technology uses a combination of robotics, big data, and natural language processing integrated for the solution of KYC, AML, Tax classification, and other compliance activities.
Q5. How difficult was to integrate domain knowledge into advanced technology?
Michael Henry: Domain knowledge is critical. KPMG invested significant regulatory and compliance expertise to reinvent this process for ourselves and our clients. The technology only works because of this investment.
We use advanced technology, but it is all commercially available. Our ability to define specific ontologies and compliance rules on that technology is the differentiator.
Q6. How do you capture information from SEC filings, blog entries, social media, text messages and other sources of structured and unstructured data without manual intervention?
Michael Henry: We capture information from structured and unstructured sources through a combination of technologies. Optical character recognition (OCR) and natural language processing (NLP) software drive our content enrichment process. This allows our platform to ingest unstructured documents (with or without metadata), identify them, and then extract the relevant content according to our ontological models. Some exception processing occurs at this stage, especially if the quality of the documentation is poor.
Q7. How do you integrate, organize and mine customer data?
Michael Henry: Customer data are ingested to the platform through system extracts, tying in to document repositories and the establishment of secure FTP sites. These data then pass through our content enrichment engine and ultimately reside in our MarkLogic NoSQL database.
Q8. Why did you choose MarkLogic’s Enterprise NoSQL database?
Michael Henry: First, we are solving mission-critical subjects for the world’s leading financial institutions. We needed to have an institutional-grade, enterprise-hardened database at the core of our platform.
Second is given the size of the data sets involved, we needed to have a highly scalable database that could handle petabytes of data while simultaneously staging and orchestrating multiple run-time sequences. Finally, we found MarkLogic very aligned to our vision and a good partner in bringing the solution to market.
Q9. How do you use semantics, text analytics and visualisation?
Michael Henry: Semantic analysis allows us to handle unstructured data in natural language formats. Extracting the list of beneficial owners from a 100-page trust document can take a human hours. The tools are so proficient now, that with the right ontological models we can obtain dozens of data from an unstructured document at high volumes with little human intervention. We have been able to ingest hundreds of individual loan documents and produce a data hierarchy by client, by loan, and by event.
Q10. What results did you obtain so far? What is the order of magnitude reduction in human efforts you obtained? As human involvement in the process declines, is the number of errors in reports also declining?
Michael Henry: Today, we serve more than 20 clients. In the tax compliance area, a human may spend more than an hour ingesting a W8 form and conducting due diligence. Most of this is reading KYC documents. Our platform has the ability to handle more than 10 of these per hour per human exception handler. If the task involves humans reading documents and applying validation or other policies, and the rate of actual exceptions is low, we can take 80-90% of the manual effort out. And the tools keep getting better.
More important than the productivity gain is the consistency and accuracy of the automation. No human operator can apply thousands of policy rules consistently. We continue to tune our models, and the machine never forgets.
Q11. In your opinion, what is the impact of the introduction of “Digital Labor”services for the job service market and for the society at large?
Michael Henry: Digital labor is the name for a new class of tools that can automate routine cognitive tasks. The benefits of automation are similar to previous waves. Many years ago I helped automate a reconciliation function for a large asset manager. Humans took authorization reports from their investment control system and matched them against the confirmations coming from their counterparts. This was a terrible job, and luckily no one does this anymore.
Digital labor has the potential to improve the financial services sector by improving compliance, providing more analytics for risk and control functions, and improving efficiency.
Michael Henry Principal, Financial Services, KPMG LPP
Michael is a Principal in KPMG’s Digital Labor practice with more than 25 years’ experience in financial services. Michael specializes in the application of sophisticated technologies (big data, natural language processing, artificial intelligence, machine learning, workflow and robotics) to automate compliance processes. Michael has worked with global and regional banks, and his experience includes living and working in Europe and Asia.
– ￼FATCA Onboarding & Compliance Solution. KPMG, 2015 (LINK to .PDF)
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