Why banks are using regtech for competitive gain

The global financial crisis of 2008 had a profound effect on how policymakers manage risk, which has led to major changes in the way banks insulate themselves against major shocks


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.

Once you introduce a human being in any process, there is the potential for error

“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.


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