Banking is evolving – shouldn’t risk and compliance management evolve along with it?

Change and progress are constant – the banking sector has always been improving its services by using the latest available technology. However, sometimes the changes are more than incremental – sometimes we can have a paradigm shift which completely changes the way things are done. Banking may be undergoing such a shift, towards a new normal. It is important to take a step back and reassess processes and priorities whenever there is a major change. The changes may have opened new opportunities and may have also introduced new threats. As banking evolves, we need to look at our existing approach towards risk and compliance and see how we can improve it.

The future of banking

While all industries are evolving as new technology becomes available and demographic changes affect customer requirements, banking is significantly more complicated than other industries. Most industries simply deliver a service or a product. Banking doesn’t simply provide banking services – banks play a vital role in the economy, providing loans to people who want to start businesses, helping people get their first car, setting families up with payment plans for their homes, and so on. Banking affects and is affected by a larger number of factors than most industries.

The future of banking is thus being shaped by multiple changes in the business environment, such as:

  • Changing customer needs
  • Evolving markets
  • Born-digital competition
  • Banking technology

Changing customer needs

Any business needs to ensure it is delivering what customers want, this is the way of success. The problem is that customers now have very different priorities than a couple of decades ago. Mobile banking is a good example of changing customer needs. Business Insider’s report revealed that 89% of customers use mobile banking, and 64% of customers now look up a bank’s mobile banking offers before opening an account. Customers now want instantaneous banking – they don’t like to visit the retail banking branch, they want to be able to make payments, check balances, and transfer funds with a single tap on their phone.

Evolving markets

The change in customer needs isn’t limited to banking services – the market of banking products is also changing. Banks had a steady stream of new customers. As people grew older, they opened their first bank account, then they would get a credit card and a car loan. Once they had a stable career, they would look at purchasing a house and settling down with a family. This changed with millennials and has continued with Generation Z.

Millennials and Gen Z are replacing banks with alternatives at a rate faster than before, often preferring credit unions or Neobanks (the industry term for digital Fintech companies that provide banking and payment services and often have no physical branches). Only 33% of millennials have credit cards. Millennials are also more conservative regarding car loans – while they still purchase cars, they are much more conservative in how much money they spend on the cars and are likely to choose used or small vehicles. This cohort is also less likely to purchase a home, compared to the previous generations when they were at the same age.

Born Digital Competition

While Fintech started as a domain of technology that would help banks, there are some Fintech operations that are competing with banks now. Sometimes referred to the industry as Neobanks (Challenger banks in the UK), these are becoming popular all over the world. These include businesses like Simple in the U.S., WeBank in China, Revolut in the UK, and so on. There are other types of digital competitors as well – such as Apply Pay and Google Pay, which are replacing traditional credit and debit cards. Then there are Fintech applications that focus on one type of service, such as Venmo which allows people to easily share and make payments to each other.

Most of these organizations are making inroads by delivering services that are more convenient than banks. Their marketing message is that banks are too complicated; why not simply sign up with us online and get all the services you really need without any of the hassle?

Banking Technology

The technology available to bankers is making gigantic leaps in our era. Banking remained stagnant for centuries, before information technology made it possible to make things better and faster. What became with punch cards turned into work computers, followed by the Internet. Today technology is harnessing automation and artificial intelligence. Each new iteration of technological capability opens new opportunities for banks.

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Major changes ahead

Looking at the many different factors it becomes clear that banking in the future will be starkly different from what we have right now. There has always been an emphasis on increasing retail banking branches, with many major banks touting the number of branches they have as a competitive advantage, but the advent of digital banking means that customers are now comfortable with banks even if there isn’t a branch they can physically visit.

The preference for Fintech isn’t really a preference for Fintech over banking – it is a preference of convenience. Born-digital competitors are wooing customers because, as they only focus on a few services, their total focus is on ensuring smooth service delivery. Their apps are usually more straightforward than banking apps, and their services can be faster than banking services. Changing market factors mean that banks will have to rethink some of their income streams.

Banks used to spread the way Blockbuster spread – ensuring that there were lots of locations, so services can be delivered in person to more markets. However, we all know what happened to Blockbuster, which is why banks are now trying to spread the way Netflix spreads – being able to deliver services without requiring a physical location.

What does this evolution mean for risk and compliance management?

We have previously talked about how exciting new banking technology enables faster and better risk and compliance management. While faster and better risk and compliance management is obviously beneficial to banks, it becomes a requirement when you look at how banking is evolving.

Banks need a system that allows them to meet and even exceed the efficiency and productivity of their born-digital competitors, but they still need to abide by banking regulations. Using risk and compliance management technology such as Fintech and Regtech provides innovation without increasing the risk.

Improving compliance accuracy and speed

Solutions like the American Bankers Association (ABA)-endorsed Predict360 empowers organizations to achieve better compliance results while reducing the time and cost associated with compliance activities. The automation of processes and streamlining of workflows results in a significantly more productive compliance department. Speed is a crucial element when countering competition from born-digital firms, and automated compliance management ensures that services can be delivered quickly without compromising on compliance adherence.

Compliance management systems deliver better and faster compliance by:

  • Bringing all compliance activities under one platform
  • Integrating compliance with other domains such as risk and regulatory change
  • Displaying important compliance updates and data on executive dashboards
  • Automatically notifying stakeholders when a compliance violation is detected
  • Constantly monitoring compliance levels

Managing risks with insights and predictions

Risk management also gets enhanced significantly with Fintech. In the beginning, most risk management solutions focused on bringing risk management to a digital platform, because it makes the data easier to manage and visualize. However, the risk management systems of today go beyond monitoring and streamlining; they add predictive analytics and risk insights to risk reporting, significantly increasing their effectiveness without any significant addition in cost or time required. They analyze relevant data and issues in the organization to highlight areas of concern at run-time level.

As you can imagine, this makes them the perfect fit for banks focusing on improving the speed and efficiency of their service delivery through technology. Increasing the technology being used directly increases the amount of data being generated – banks now have access to real-time banking data and trends, which can be employed by risk management systems.

Risk management systems have many features which help risk managers gain more control and visibility over emerging risk, such as:

  • Centralized risk information from multiple sources
  • Real-time risk monitoring with notifications
  • Risk insights to extrapolate business intelligence from risk data and reports
  • Predictive analytics that use internal KPIs and external KRIs
  • Automated risk reports that can be accessed whenever needed

Fintech and Regtech – a glimpse of the future

When you look at the way the market is moving, it becomes clear that Fintech and Regtech are a glimpse of the future. The Fintech industry is booming. While financial technology has existed since the 1980s (arguably even earlier), the 2007-8 financial crisis acted as a wakeup call for businesses, which then began investing in technology that would help to make finance more efficient while reducing risks. Which brings – according to a recent survey, 82% of financial organizations (investment houses, banks, insurers) planned to invest more in Fintech for upcoming years.

Fintech has become so successful because there are multiple offshoots and subdomains, such as Regtech, which focuses on regulatory technology. A recent report (pdf link) revealed that out of total regulatory spending, 34% is spent on Regtech alone. There are similar Fintech solutions for audits, governance, vendor management, and so on.

The financial sector has always been a pioneer when it comes to technology. Metropolitan Life, an insurance business, was one of the world’s first businesses to buy the world’s first commercially available computer, the Univac. The availability of spreadsheet software was a catalyst for technology adoption in the financial industry. All the signs point to the financial sector being a pioneer once again, this time with Fintech, Regtech, and other similar technologies.

Banking technology for smaller banks

The Software as a Service (SaaS) model has made technology easily accessible for organizations of all sizes. Specialized IT solutions in past decades, prohibitively expensive. These were bespoke solutions which took a long time to develop and required millions of dollars to develop and implement. The SaaS model allows vendors to provide enhanced solutions at a fraction of the cost, due to the completely custom-made solution, they customize an existing solution and provide it through the cloud, significantly reducing development and implementation cost.

Predict360 works at the same way and is being used by many small and mid-size banks across the country. The ease of customization, implementation and maintenance means that banks can deploy and effective risk management and compliance management solution without requiring a major financial commitment or disruptions to ongoing business processes. If your organization is looking for a solution that delivers next-gen risk and compliance management functionality while delivering excellent ROI, get in touch with the 360factors team to find out more.