Why banks are using regtech for competitive gain

The years since the finan­cial crash have seen banks intro­duce inter­nal con­trols to improve trans­paren­cy and account­abil­i­ty, but they still have much more to do to stay on top of risk.

Banks now have more process­es to run and more data to man­age, and reg­u­la­tors are try­ing to pre­vent prob­lems before they even hap­pen.

“In the past, reg­u­la­tors would audit, but nev­er real­ly get involved,” says Gary Wright, chief exec­u­tive of B.I.S.S. Research. “Nowa­days, the bank­ing com­mu­ni­ty does­n’t invest in or build new sys­tems and process­es with­out the reg­u­la­tor. The reg­u­la­tor is close by, so they’re kept informed of what’s going on.”

The growth in reg­u­la­tion has had a large impact on the “con­trol room”, a com­pli­ance and mon­i­tor­ing func­tion in banks.

Lisa Quest, head of Oliv­er Wyman’s pub­lic sec­tor and pol­i­cy prac­tice for the UK and Ire­land, says: “Banks have invest­ed a lot in com­pli­ance and risk man­age­ment fol­low­ing the finan­cial cri­sis, in terms of both con­duct risks and pru­den­tial risks. More recent­ly there’s been a huge focus on non-finan­cial risk com­pli­ance such as anti-mon­ey laun­der­ing and counter-ter­ror­ist financ­ing and cyber.”

Putting regtech at the heart of transformation

Banks have invest­ed not just in human resources, but also in sys­tems and tech­nol­o­gy, real­is­ing that reg­u­la­to­ry com­pli­ance can be part of their dig­i­tal trans­for­ma­tion.

David Gurlé, founder and chief exec­u­tive of Sym­pho­ny, a cloud tech­nol­o­gy provider, says much has changed. “In the past, there was an army of peo­ple mak­ing all the checks and bal­ances to make sure the finance trans­ac­tion goes through; nowa­days the com­put­er is doing a lot of this. Once you intro­duce a human being in any process, there is the poten­tial for error and elim­i­nat­ing that cre­ates less fric­tion in the cogs,” he says.

Con­trol rooms have vast­ly improved by inte­grat­ing tech­nol­o­gy to increase mon­i­tor­ing of busi­ness risks and return rel­a­tive to cap­i­tal usage, accord­ing to Dr Nadia Kap­pou, asso­ciate pro­fes­sor of finance and pro­gramme direc­tor at Hen­ley Busi­ness School.

“This com­bined with a much more rig­or­ous approach to staff con­duct has result­ed in a safer and more effi­cient finan­cial sys­tem for the end-user,” she says.

Reg­u­la­to­ry tech­nol­o­gy, known as regtech, can help banks over­see issues that occur very quick­ly, such as a liq­uid­i­ty squeeze or com­pli­ance.

How tech can hold FS leaders accountable

One of the more recent post-finan­cial cri­sis reg­u­la­tions is a UK regime intro­duced in 2016 to make senior man­agers in finan­cial ser­vices firms account­able for their deci­sions.

Mark Turn­er, a man­ag­ing direc­tor at Duff & Phelps’ com­pli­ance and reg­u­la­to­ry prac­tice, says tech­nol­o­gy helps senior man­agers meet their respon­si­bil­i­ties. “When over­see­ing com­plex organ­i­sa­tions through man­u­al process­es and email or ver­bal com­mu­ni­ca­tions, it’s very dif­fi­cult for man­age­ment to ensure that when there are red flags, they know where to look. Tech­nol­o­gy can­not fix all that, but it can help to see the wood from the trees,” he adds.

There is now a whole range of tech­nolo­gies to help banks man­age their risks and com­ply with reg­u­la­tion, while also giv­ing them a com­pet­i­tive advan­tage.

Mark Hep­sworth, chief exec­u­tive of Asset Con­trol, says: “When­ev­er banks do some­thing that’s dri­ven by a reg­u­la­to­ry man­date, they always try and get some­thing else out of it as well, such as make the busi­ness more pro­duc­tive or improve oper­a­tional effi­cien­cy and take costs out.”

Banks can use the mon­ey saved to rein­vest in oth­er areas for future growth and devel­op­ment of the busi­ness.

Asset Con­trol aggre­gates, cleans­es and val­i­dates the data that is fed into bank risk mod­els. Hep­sworth says fail­ures of banks such as Lehman Broth­ers led to a lot more scruti­ny around the qual­i­ty of the data used to under­stand cap­i­tal risk posi­tions.

Banks newly receptive to emerging tech

Banks have also adopt­ed cloud and open source tech­nolo­gies. “Up until about two years ago, banks were pret­ty ner­vous about open source tech­nol­o­gy, but that’s since changed,” says Hep­sworth.

Sym­pho­ny helps reduce com­pli­ance risk asso­ci­at­ed with increased dig­i­tal infor­ma­tion-shar­ing by using cloud tech­nol­o­gy. This is now used by many banks and has been a game-chang­er for work­ing from home dur­ing the coro­n­avirus pan­dem­ic, accord­ing to Gurlé.

New tech­nolo­gies dri­ven by arti­fi­cial intel­li­gence (AI) and machine-learn­ing are being used in risk man­age­ment process­es such as anti-mon­ey laun­der­ing and fraud. 

“These tech­nolo­gies help enhance trans­ac­tion mon­i­tor­ing, client onboard­ing and inves­ti­ga­tion process­es, which low­er the cost and time to check and acquire new cus­tomers and mon­i­tor ongo­ing activ­i­ty,” says Quest at Oliv­er Wyman. “This can bring a com­pet­i­tive advan­tage, for exam­ple through faster more stream­lined onboard­ing of new clients.”

When the dig­i­tal-first neobanks entered the UK mar­ket, they could onboard cus­tomers in a frac­tion of the time on their mobile devices.

“By intro­duc­ing sophis­ti­cat­ed reg­u­la­tion tech­nol­o­gy to auto­mate com­pli­ance check­ing, incum­bent banks have like­wise expe­dit­ed their process­es to inno­vate and improve cus­tomer expe­ri­ence,” says Quest.

Mir­ror­Web is a start­up which enables finan­cial firms to cap­ture records of their web­site and social media com­mu­ni­ca­tions. “One of the key areas of con­cern, even pre-COVID, was dig­i­tal com­pli­ance and stay­ing account­able of every­thing being pub­lished online and via social media. This has now become an even big­ger chal­lenge due to the pan­dem­ic,” accord­ing to its co-founder and chief exec­u­tive David Clee.

The banks using tech to give them an edge

Some banks are going fur­ther than oth­ers in using tech­nol­o­gy to their com­pet­i­tive advan­tage. HSBC is often called a leader in embrac­ing new tech­nol­o­gy, while Amer­i­can banks which bounced back faster from the 2008 crash have had big­ger war chests to invest in new tech­nolo­gies.

Clee says HSBC and J.P. Mor­gan have tak­en “sig­nif­i­cant steps for­ward” by adopt­ing AI and regtech solu­tions to help reduce finan­cial crime and meet reg­u­la­to­ry require­ments.

Stan­dard Char­tered Bank is “focus­ing a lot on its infra­struc­ture and the impor­tance of data with­in its risk man­age­ment process,” Hep­sworth adds.

Banks have tend­ed to bolt new tech solu­tions like AI or blockchain onto their lega­cy sys­tems with­out tak­ing a holis­tic approach, but the COVID-19 pan­dem­ic has spurred banks to re-eval­u­ate all their sys­tems and tech­nol­o­gy tools.

“Banks need to have a devel­op­ment strat­e­gy or plan of what they want to be going for­ward, while keep­ing the exist­ing busi­ness going. These issues are now start­ing to be tack­led and COVID-19 is help­ing to dri­ve this,” says Wright of B.I.S.S. Research.

Tech­nol­o­gy is rev­o­lu­tion­is­ing the bank­ing sec­tor. Banks that use it, not just for com­pli­ance and meet­ing reg­u­la­tion, but also to improve their busi­ness­es for the ben­e­fit of their cus­tomers, will thrive in the future.