Online spending partly rescues dismal December

Today’s ONS retail sales figures for December saw overall sales fall 0.6% against November. But a strong showing from department store web sales saved Christmas for many retailers says ParcelHero.

Retail spending estimates released today by the Office for National Statistics (ONS) reveal December’s Christmas peak shopping period was far from being a cracker for most retailers. Overall sales were down 0.6% against November’s official figures, and the UK courier services expert ParcelHero says only e-commerce sales prevented a complete retail collapse this Christmas.

ParcelHero’s Head of Consumer Research, David Jinks MILT says: ‘December’s retail sales results were a grimly fitting finale to a truly dire year for retailers. Spending was down 0.3% and the amount we bought down 0.6% against November. The one bright point was a strong performance for many retailers’ web sites. Online spending was up 1.6% against November, with department stores web sales booming: up a heartening 15.5% against November. Footfall may be falling, but many consumers still prefer to buy more valuable gifts from familiar stores – even if they chose to do so online.’

Concludes David: ‘And there was more good news for retailers as their overall online sales grew 5.6% against last December. That’s a strong year-on-year result. Overall, December’s retail figures show shoppers like the peace of mind of the extra 14 day no quibble returns that online sales enjoy, but still like to buy from big name retailers. The close collaboration between stores and the courier services trusted for their home deliveries means shoppers were happy to have more items than ever delivered to their homes this Christmas.’

Yooz Named Finalist in 2019-20 Cloud Awards

Yooz, the international provider of intelligent P2P software, has been shortlisted in the category Best Cloud Automation Solution in The Cloud Awards, the international Cloud Computing Awards program.

Since 2011, The Cloud Awards program has sought to champion excellence and innovation in cloud computing. Entries are accepted throughout the globe and across multiple industry sectors.

Yooz COO and Chief Innovation Officer Laurent Charpentier said, “To be shortlisted for our work in this international program is not only an honour, but clear recognition of the successes and customer satisfaction we strive to achieve with leading cloud technologies.”

Head of Operations for the Cloud Awards, James Williams, said: “Yooz has recognised the importance of adopting and pioneering leading cloud technologies in order to deliver outstanding client success, which is why they’re a deserving finalist in the Cloud Awards program.

“The Cloud Awards team already had a near-impossible task sorting the exceptional from the excellent and the bleeding-edge from the cutting-edge. Weighing both proven successes and exceptional promise across several unique categories is a constant challenge.

“We see organisations not only adopting leading technologies, but constantly innovating and leveraging their expertise to provide unprecedented levels of customer satisfaction.”

Combating Insurance Fraud With Machine Learning

Most insurance companies depend on human expertise and business rules-based software to protect themselves from fraud. However, people move on. And the drive for digital transformation and process automation means data and scenarios change faster than you can update the rules.

Machine learning has the potential to allow insurers to move from the current state of “detect and react” to “predict and prevent.” It excels at automating the process of taking large volumes of data, analysing multiple fraud indicators in parallel – which taken individually may often be quite normal – and finding potential fraud. Generally, there are two ways to teach or train a machine learning algorithm, which depend on the available data: supervised and unsupervised learning.

Predictive modelling

In predictive modelling or supervised learning, algorithms make predictions based on a set of examples from historical data. You can present an algorithm with historical claims information and associated outcomes often called labelled data. It will attempt to identify the underlying patterns in fraudulent cases. Once the algorithm has been trained on past examples, you can use it to infer the probability of a new claim being fraudulent. AKSigorta Insurance is using advanced predictive modelling as part of its investigation process. The company has managed to increase its fraud detection rate by 66% and prevent fraud in real time.

There is a wide variety of predictive modelling algorithms to choose from, so users should take into account issues such as accuracy, interpretability, training time and ease of use. There is no single approach that works universally. Even experienced data scientists have to try different methods to find the right algorithm for a specific problem. It is, therefore, best to start simple and explore more advanced machine learning methodologies later. Decision trees, for example, are an excellent way to start exploring complex relationships within data. They are relatively easy to implement and fast to train on large volumes of data. More importantly, they are very easy to understand or interpret, and can be a good starting point for new business rules.

Other options for more accuracy

Decision trees can, however, become unstable over time. When accuracy becomes a priority, practitioners should look at other options. Support vector machines (SVMs) and neural networks are capable of learning complex class boundaries and generalise well to unseen cases. They have been extensively used for fraud detection. Tree-based algorithms, such as gradient boosting and random forests, have also become more popular in recent years. Ideally, analysts should try multiple approaches in parallel before deciding what works best.

Supervised learning is effective in identifying familiar cases of fraudulent activity but cannot uncover new patterns. Another challenge is the limited numbers of fraud examples with which to train the algorithm. Fraud is a relatively rare event, after all. The ratio between fraud and nonfraud cases can sometimes be as much as 1 to 10,000. This means that predictive algorithms tend to be overwhelmed by the sheer volume of nonfraud cases, and may miss the fraudulent ones. Labelling new data for training a model can also be time consuming and expensive.

Unsupervised learning

Unsupervised learning algorithms are trained against data with no historical labels. In other words, the algorithm is not given the answer or outcome beforehand. It is merely asked to explore the data and uncover any “interesting” structures within them. For example, given certain behavioural information, unsupervised learning algorithms can identify groups (or clusters) of customer transactions that appear similar. Anything that appears different or rare could be flagged as an anomaly (or an outlier) for further investigation.

Unsupervised learning methods can, therefore, identify both existing and new types of fraud. They are not restricted to predefined labels, so can quickly adapt to new and emerging patterns of dishonest behaviour. For example, a New Zealand health insurer used unsupervised learning methods to identify cases where practitioners were deliberately overcharging patients for a particular procedure or providing unnecessary treatment for certain diagnoses.

Unsupervised anomaly detection methods include univariate outlier analysis or clustering-based methods such as k-means. However, the recent move towards digitalisation means more data, at higher volumes, from a wider range of data sources. New algorithms, such as Support Vector Data Description, Isolation Forest or Autoencoders, have been introduced to address this. These may be a more efficient way of detecting anomalies and allow for faster reaction to new fraud.

Social network analysis

These methods are useful for identifying opportunistic fraud. However, many fraudsters today operate as part of professional, organised rings. Activity may include staged motor accidents to collect on premiums, ghost brokering, or collusion between patients and health practitioners to inflate claim amounts. These career fraudsters can repeatedly disguise their identities and evolve their way of operating over time.

Social network analysis is a tool for analysing and visually representing relationships between known entities. Examples of shared entities could be different applicants using the same telephone number or IP address, or a motor accident involving multiple people. Social network methods can automate the process of drawing connections from disparate data sources and visually representing them as a network. This significantly reduces the investigation time – in one case, from 10 days to just two hours. In the UK, a large P&C insurer made £7 million savings per annum by uncovering groups of collaborating fraudsters using network analytics.

A hybrid approach

No single technique, however, is capable of systematically identifying all complex fraud schemes. Instead, insurers need to combine sophisticated business rules and advanced machine learning approaches. This will allow them to cast the net wide, but improve accuracy and reduce false positives, making fraud detection more efficient.

By Georgios Kapetanvasileiou, Analytical Consultant at SAS

ONS Monthly Inflation figures – comment

“Today’s inflation figures increase the likelihood of an interest rate cut following the next Bank of England (BoE) Monetary Policy Committee meeting. With consumer prices growing by the slowest pace in three years, and Brexit uncertainty and global headwinds continuing to impact the outlook for the British economy, calls for more monetary stimulus to reach the BoE’s 2% inflation target are likely to intensify.

“In the short term, the low inflation rate will have a positive impact on for households as wage growth continues to outstrip inflation by a comfortable margin. At the same time, an interest rate cut will help indebted households and companies to meet their repayment obligations. The latest Dun & Bradstreet UK Industry Report shows that there were 12,308 corporate liquidations in Q1-Q3 2019, down by 1.1% in a year on year comparison. At the same time, the percentage of payments made on time has risen from 35.9% in December 2018 to 44.7% in September 2019 based on analysis of available data. As a result, the average payment delay for B2B payments in the UK (13.5 days) is now more in line with the European average (13.4 days).”

Markus Kuger, Chief Economist, Dun & Bradstreet

UK inflation slows – reaction

Following on from the announcement that UK inflation slowed more than expected in December, Andy Scott, Associate Director at JCRA, said: “Today’s inflation data has strengthened the case for UK interest rates to be cut at the Bank of England’s meeting this month, as weaker economic growth both domestic and foreign weighs on price pressures.

“With UK economic growth at its weakest pace since 2012, as businesses and consumers continued to scale back spending due to uncertainty over Brexit and in the lead up to December’s election, there is a growing consensus among the Bank’s MPC that monetary stimulus is necessary. Governor Carney signalled he was weighing up a rate cut in comments over the weekend.

“The Bank has been patient and waiting to see what happens with Brexit, but it has become clear that the economy is close to stalling as demand continues to fall and the risk of recession rises, creating more urgency for the Bank to act.

“While the certainty of the UK election result and the departure from the EU into a transition period at the end of this month has lifted business and consumer optimism, there’s no guarantee that it will translate into real spending and may prove temporary with trade talks set to begin next month. Against this backdrop, it seems to make sense to cut rates to stimulate demand with inflation slowing, even if the impact will be limited by the fact that borrowing costs are still close to record lows.”

Commenting on UK inflation data putting further pressure on the pound

Commenting on UK CPI inflation data putting further pressure on the pound, Olivier Konzeoue, FX Sales Trader at Saxo Markets, said: “More MPC Members are singing the same dovish tune with Vlieghe, an influential external member, being the last to break silence and pledge to vote for a rate cut should the UK Economy fail to bounce in Q1 2020. All data are closely monitored this month. UK CPI printed below expectations this morning, confirming the recent trend of muted inflation and overall softer data. The MPC meeting seems more “live” than ever in January with a 62% probability (from 50% yesterday) for a 25bps rate cut, putting further pressure on the ever resilient Great British pound.”

Product stability and rate rises mark new year for 95% LTV first-time buyer borrowers

Mortgage insurer, AmTrust’s, latest Mortgage Loan to Value (LTV) Tracker has today revealed a degree of positive news for first-time buyers with 5% deposits, as the number of products available to them increased across all categories, however average rates also increased while those for their 75% LTV counterparts continued to fall.

The differential between the average rates taken by those with 25% deposits, compared to those with 5%, has widened further to 1.56% as 75% LTV average rates drop to 1.44% and 95% LTV average rates rise to 3%.

Even as the average first-time buyer house price has dropped to £222,676 – meaning the average deposit required for both 75% and 95% borrowers has dropped slightly – this means that those with 5% deposits are (on average) paying over 51% more each month and year for their mortgages when compared to those who are able to put together a larger deposit.

Those with a 5% deposit will pay just over £1k per month on average for their mortgage, while those with a 25% deposit can expect to pay £663. This is the second iteration of the LTV Tracker where the monthly amount for those taking out a 95% LTV mortgage has been above the £1k amount, even if it is a slight fall from Q3 last year.

AmTrust said the theme of average rates rising for those seeking 95% LTV mortgages had continued throughout the tail-end of 2019, however with a greater degree of political certainty, it anticipated that more lenders might begin to adjust their rates in order to secure greater levels of business.

However, it said the overwhelming focus – and funds – would remain targeted at the perceived lower-risk borrowers with higher deposits and those who had the support of the Bank of Mum & Dad.

Product numbers increase slightly for 95% LTV borrowers

This iteration of the Tracker bucks the theme of the last two quarters, with product numbers inching up slightly for 95% LTV borrowers, after two consecutive quarters of falls.

The AmTrust LTV survey reviews the number of actual product options available to first-time buyers with either a 5% or 25% deposit based on the price of an average first-time buyer house from UK Finance October 2019 figures, the price of an average house as outlined by the December 2019 Halifax House Price Index, and the price of a house at the starting tier of stamp duty land tax, £300k. Below this amount first-time buyers do not currently need to pay any stamp duty.

In order to do this, AmTrust uses one of the online mortgage search engines which includes deals available to both mortgage advisers and direct-only.

The end of 2019 appears to have matched the theme of the year previously when mortgage lenders appeared to show an increase in appetite for higher LTV borrowers, upping the product availability for those with 5% deposits across both two-year and all other terms.

This has not been matched in the 75% LTV categories which showed some drops in product availability for all terms/all mortgage deals. AmTrust said this might be as a result of lenders like Tesco Bank and Sainsbury’s Bank leaving the market, and other lenders readjusting their offerings to these changes.

However, AmTrust said the overwhelming theme of product choice for first-time buyers continued to be significantly more mortgages available to those with larger deposits, with over six times as many products in the 75% LTV categories compared to 95% LTV.

Patrick Bamford, Business Development Director at AmTrust Mortgage & Credit, commented: “There has been a slight upturn in terms of product choice for 95% LTV borrowers in this latest version of our LTV Tracker with, for the first time in two quarters, an increase in product choice for those with a 5% deposit.

“This adds to the other positive news which is a slight drop in the average deposit required by high LTV borrowers and a corresponding fall in the average amount payable each month, but these are only very marginally and are unlikely to make a major difference to those seeking to get on the housing ladder.

“The more worrying trend remains an increase in average rates for 95% LTV borrowers and an increase in the rate differential between these first-timers and those with a 25% deposit. We still see the latter group paying 50% less each month in mortgage payments than high LTV borrowers, and this is a trend that shows no sign of changing.

“It means that any potential first-timer who wants to get anywhere near the most competitive rates in the market, needs a significant deposit to do so. At current levels that means having to save over £55k, or be lucky enough to have the Bank of Mum & Dad to call upon – given this situation, it is perhaps not surprising that the number of mortgages available to those in such a fortunate situation continues to grow.

“We are however in danger of creating a mortgage/housing market which can only be accessed by those with family support and this is likely to mean significant numbers of potentially credit-worthy borrowers not being able to become home-owners.

“With a new Government in place, the market will be watching March’s Budget very closely to see if there is any further support to be provided to first-timers, plus of course next year the Help to Buy Scheme will be changed so it is only accessible by first-timers. However, what we need to see is a greater focus on providing high LTV loans, not just for those starting their property journey but those already on the ladder who might wish to move up.

“Regulatory factors play a major role in curbing the amount of high LTV lending lenders can currently write, and we would like to see these addressed and amended, in order to allow lenders to write more business with those borrowers who do not have the support of family and friends to get on the ladder.”

Comment – The disappearing risk of negative interest rates

Negative interest rates and pre-hedging upcoming interest rate exposure were factors when devising hedging strategies last year. At the start of 2020 both scenarios remain relevant although the need has shifted.
The UK election result removed some of the uncertainty that blighted financial markets in the final quarter of last year. Nevertheless, the future direction of interest rates splits opinion. Although creating a hedging strategy is not about “beating the market”, a view on interest rate moves can shape a hedging strategy.

The expectation that GBP interest rates will turn negative has fallen, even amongst those who think they are likely to fall further. During July and August last year when fears of a no-deal Brexit increased, concern about negative interest rates was rife. For borrowers with Libor floors within their floating rate loan agreements, the threat of negative interest rates created a dilemma.

Hedging negative rates

Interest rate swaps are commonly used to hedge the Libor risk in a floating rate loan. But if Libor turns negative, the borrower would be required to pay the negative Libor rate on the swap and would not receive it back under the loan facility, increasing the borrowers’ cost of funds.

Negative interest rates remain a possibility, however we have seen a fall in the number of enquiries to hedge the Libor floor in a debt facility. Methods to hedge this risk include adding a floor to the floating leg of an interest rate swap or by buying an interest rate cap.

When adding a floor to an interest rate swap, cost is a factor, despite floors being cheaper now than they were back in July and August last year. Back then the five-year swap rate was in the mid 50bps and the cost to include a floor in the interest rate swap was over 20bps. It would now add just under 10bps to the fixed rate of a five-year interest rate swap.

Interest rate caps

Interest rate caps are an obvious alternative to a floored interest rate swap to navigate the issue of negative rates. However, now that interest rates are higher, cap premiums have also increased, which has deterred some borrowers from using this strategy. To compare the two, it can be useful to consider the breakeven rate for the interest rate cap. The average Libor fixings need to be below the breakeven rate for the interest rate cap to be more economical than an interest rate swap for the life of the product. For a five-year cap with a 1.25% strike, Libor would need to average below 0.65% to be more economical than a floored interest rate swap for the same period.

There are also borrowers who are concerned that interest rates will push higher. This is partly fuelled by an expected rise in government borrowing to deliver the investment promised during the election campaign. It’s expected this will have a greater impact on longer dated interest rate swaps rather than the front end of the interest rate curve.

Those expecting interest rates to remain “low or lower for longer” appear to be in the majority, but that hasn’t resulted in a meaningful shift towards hedging the risk of negative interest rates. At the same time, now that swap rates are higher, the majority of swaptions are bought to hedge the extension element of an agreed debt facility rather than unknown future debt requirements. If swap rates do fall it may encourage the opportunistic use of swaptions that we witnessed last year.

By Rhona Macpherson, Director at JCRA

What Brexit blues? New research reveals over half of businesses in the financial sector believe Brexit will have a long-term positive impact

A new state-of-the-nation study into how businesses in the financial sector are prepared for Brexit, has revealed a staggering 37% of businesses believe the process of exiting the EU is currently having a positive impact on their business, while 29% feel it hasn’t had any impact at all.

Commissioned by global sales, negotiation and communication experts, Huthwaite International, the report shows that post-Brexit business prospects remain positive, with 51% of businesses believing their growth potential will prosper post-Brexit, regardless of the outcome.

When looking at what worries businesses most about the UK leaving the European Union, economic stability, a no deal Brexit and changes to laws and legislation ranked as the highest concerns.

Improving negotiation skills also ranked as the biggest priority amongst businesses before the Brexit deadline, with many sighting it to be a key priority when it came to safeguarding profits and reducing overheads.

Tony Hughes, CEO at Huthwaite International said: “Gaining the skillset and knowledge to survive this economic uncertainty is vital for business success. The UK is packed with ambitious and prosperous companies that in theory should flourish regardless of economic uncertainty, however the importance of obtaining the core skillsets to flourish shouldn’t be underestimated.

“One of the few certainties the UK faces is that, for selling organisations, things are getting tougher. As buying organisations entrench, delaying or even cancelling purchasing decisions, sales teams across all sectors and markets are having to up their game. This means sophisticated negotiation skills aren’t just important to ensure the UK secures a quality deal with the EU, but also form the fundamentals for ensuring business success across the UK too.”

APP fraud victims face £3 billion compensation shortfall

Victims of Authorised Push Payment (APP) fraud face a £3 billion shortfall in compensation according to new Fraud Tracker figures from secure payments solution Shieldpay.

Some 4.2 million1 people in the UK have been caught out by scammers at some point in their life through APP fraud. APP fraud happens when someone is tricked into moving money from their own bank account directly into that of a fraudster. On average victims of APP fraud are left £1,387 out of pocket. It’s women who suffer greater financial loss at the hands of fraudsters being conned out of, on average, £1,779. Men are, on average, defrauded by £1,125.

The Shieldpay research reveals that victims of APP fraud who contact either their bank, building society or payment provider receive less than half of the total scam value back, just 48%. This means victims face a shortfall of £3 billion2 pounds in compensation received. 15% of people receive no compensation at all.

Shieldpay protects people when they are transferring money to an individual or business they don’t know. Shieldpay’s patent pending payments process fully verifies the identity of both sides of any transaction, holds funds securely and only releases them once both parties confirm they are happy.

Fraudsters adopt a number of different methods when trying to part people from their money. Victims are most likely to be targeted by fraudsters over the phone (27%), followed by social networking sites (22%). Over one in five (21%) victims are contacted in person by doorsteppers, 16% by clicking on a fake ad, 15% when making a purchase online and 12% on an online dating site.

While the industry fails to stop innocent people becoming victims it is taking steps to reduce the number of consumers left out of pocket by APP fraud. A voluntary code introduced in May 2019 is designed to improve levels of compensation by banks. Yet just 46% of people have heard of it and 27% of these, despite having heard about it, don’t understand it at all.

Peter Janes, CEO and Founder at Shieldpay, said: “Blameless victims of APP fraud are being left thousands of pounds out of pocket while fraudsters continue to let the good times roll. It shouldn’t be this way; the industry must do more to protect consumers.

“The voluntary code introduced last year is a positive step but compensating victims is simply firefighting without tackling the source of the problem. Fraudsters must be stopped in their tracks and consumers protected against transferring money into accounts which are held by scammers.

“Full identity verification and background checks, which raise red flags about a business’s or individual’s history, are the only way to make a dent in the sky-high levels of fraud the country is currently experiencing. The technology exists but it’s the responsibility of the individuals and the payments industry, including online marketplaces and banks, to put it in place.”