Financial institutions must rethink their core business models to respond to regulatory and technology challenges while keeping customers at the heart of everything. But it’s not just legacy systems holding them back.
Western financial institutions (FIs) were among the first to develop and use information technology in the 1960s. During the ‘70s and ‘80s, they introduced large mainframe systems to support analogue bank services. However, these once innovative legacy systems have become a dead weight. They no longer fit the needs of the digital world and they have proven unwieldy and difficult to update. Meanwhile, the Eastern world, once seen as backwards, is now leap-frogging ahead of the West in providing a truly digitalised financial experience. Alipay and WeChat offer digital native mobile banking services at your fingertips. Freed from the shackles of legacy systems, complex regulations, and with huge domestic customer bases, new Asian technology companies have become major playersin the global marketplace in the last ten years. At home, Western FIs are facing competition from digitally-native FinTech challengers who are attacking their most profitable segments of business.
At the same time as these unprecedented competitive and technological pressures, there is a regulatory tsunami,with over eighty regulatory changes putting an even greater stress on the industry’s IT systems and internal processes. Many of the regulations will harmonise the industry, making it more standardised and transparent on a local and global level.
It is not only legacy systems that hold FIs back. The attitudes, incentives and structures of incumbents are an equal, if not greater, barrier to change. Incumbents are most often silo-structured with incentive programmes, management, and organisations that aren’t well suited to meeting the holistic needs of the future. Even if incumbents could wave a magic wand and transform their 1980s mainframes to sleek a cloud-based digital solution, they would still fail because their businesses are not structured to take advantage of the technology.
In the face of these threats, FIs must rethink how they do business and redesign both their technology and business models to meet the challenges of the future. Incumbents will have to eliminate product and service silos, think more in terms of customer needs and goals to become truly client centric, and natively embed compliance into solutions.
Get rid of silos and re-imagine your business
Today’s silo structures are due to legacy business models and organisational structures built for an analogue world. Incentive programmes and business management are not in line with today’s landscape. Even worse, many leaders in the industry have little understanding of the difference between computerisation and digitalisation. Many seeinternet applications as digitalisation. Unfortunately, they are only digitalised distribution channels. The wider operation still works around analogue, paper processes that are, at best, computerised.
Take, for example, applying for a mortgage. Traditionally, you would speak to a bank. You would fill out a form that gave them information about the house you wanted to buy, as well as your income and assets. The bank would verify and review the information against underwriting rules. If everything looked good, they would tell you that you had qualified for the loan. This process could take many days because each step in the process would need one or more people to look at, review and take decisions on information. Today, you can get at least a quote automatically. But think of what else you could do if you go outside the narrow blinkers of a traditional mortgage banker.
Imagine that the minute you bid on a house, which you would naturally do in an app on your smartphone, you could authorise several banks to verify your banking and asset information and run it through underwriting algorithms. Before you even got a decision on whether your bid was accepted, you could have several offers of loans waiting for you. Your personal financial advisor, another app on your phone, would have already analysed the offers and messaged you a summary of the pros and cons of each, with a recommendation of which to take. At the same time, your personal advisor would find quotes for relevant insurance and show you the cheapest utility providers. It would also recommend which stocks or funds you should liquidate to pay the deposit on the house. All this information would be summarised neatly and clearly, ready for you to take a decision and automatically executed once you authorize it. It is this re-imagining of how to deliver a service, unconstrained by the past, which is totally digital.
Do you have data control?
For incumbents to reach this digital nirvana, they must be able to control their data. FIs have an enormous amount of data that is largely untapped. The siloed nature of FIs means data is stuck in stacked layers with little linking threads. This complex structure duplicates data and services, creates frustrating reconciliation needs because there is no master source that controls the core foundation of it all. To untangle this labyrinth for management and regulatory reporting, many incumbents consolidate, clean, and complete data at downstream data warehouses. From a customer service as well as a practical and regulatory perspective, this is a bad idea based on an incomplete understanding of the business from a digital customer service and regulatory point of view.
Information must be corrected upstream, at the source, to support the business in real-time, not downstream for reporting. If all parts of the business use the same data, then there will be less problems with auditing, reconciliation, and reporting. Even better, the data will be available for new business purposes in servicing the customers in ways that you have not yet imagined. The data warehouse model will never meet the speed and accuracy needs of digital business services. FIs should service their clients based on the same data used for reporting. Today, this is not the case, costing money and creating complex compliance issues.
While data warehouses are a necessary evil to move FIs forward in their digital journey, FIs should embrace the ‘one truth principal’ for data. This means there is only one master data source servicing all operating and reporting applications. A first step in creating a corporate information foundation is to take control of all digital definitions of actors in a business eco-system. You need to define and manage all legal persons and entities with detailed information and clearly link the relationships between them as well as with the agreed and targeted products. From a system point of view, all actors such as private customers, corporates, employees, issuers, suppliers, agents or brokers shall be defined. There should be a single definition of each actor and the multiple roles they may have. In the case of a corporate, for example, legal signatories or contacts will be defined and linked to private persons. Once all actors are defined, this will be the master service provider for all services within an FI’s ecosystem and this data shall eventually feed all operational applications, ledgers and reporting functions. By implementing an actor management solution, you will have a standardised and harmonized definition of actors in your eco-system throughout the organisation.
Actor management is the first step to enable a true customer-centric approach where customer experience and customer insights drive and deliver totally digital services. By starting with actor management, FIs can manage data from the beginning of the relationship and use it throughout the customer journey to feed auxiliary functions, such as risk and compliance.
Use compliance to re-design
Because compliance is an obligation, regulatory implementation projects are swallowing large parts of FI´s IT budgets. However, these projects are often shortsighted, focused mostly on compliance and, at worst, add another layer to the already tangled systems environment. Processes are designed for compliance rather than to make business better. For example, FIs are increasingly revamping their Know Your Customer (KYC) operations, structuring their onboarding processes around compliance. But onboarding should be the first step in setting up a long-lasting business relationship and an opportunity to gain insight into the client’s needs and desires and to support a digital distribution of services. KYC for regulatory purposes is then just a hygiene factor within the bigger picture of learning about your customers and their needs so that you can serve them better.
Another example is that historically, FIs have worked mostly to detect compliance issues and limit breaks post-execution. In a digital environment, FIs must work to prevent them pre-execution. Upcoming regulations increases the pressure for banks to perform real-time checks on customers’ financial interactions, pre- rather than post-execution. These controls need quality data and fast access to information about the relationship with the client at the same time. Data quality and real-time pattern recognition will be essential to securing data and protecting it from illegal activities.
Without the kind of data quality that a structured actor management enables, and without a business-oriented view of compliance, FIs are digging their strategic technological dept even deeper. FIs will have to stop doing quick compliance fixes. They should take advantage of their large IT-budgets for compliance projects to re-engineer their processes and clean up data quality. This will take more time and be more expensive in the short term. But in the long term, FIs that bite the bullet will be rewarded with the ability to compete.
Manage budgets to build better services
Compliance should be embedded in the business, systems and processes, not put in its own silo. To take a silo view of compliance means FI´s are short changing themselves in terms of benefits of these large technology programmes. Compliance is not about checking boxes but about understanding and making decisions on risk. FIs are in the business of taking risk. Taking informed risk is what makes them profitable. RegTech provides opportunities to deliver compliance solutions quickly but must be used intelligently. For example, if you are using a Know-Your-Customer (KYC) service, you should onboard the customer and pay for the service once. If you are onboarding customers individually in each silo, then you are needlessly paying for the service multiple times.
Another example is implementation of a pre-execution control solution. Both risk and compliance limits must be checked whenever a customer instructs a FI to perform a transaction. These checks should take in to account the customers entire relationship with the FI. Instead of setting up a solution per silo resulting in multiple solutions and sets of data, FI´s should consolidate the solution on a multiple stakeholder level and share investment over several business units. At the end, all services should deliver and ensure the same level of control, independently of business unit or distribution channel.
There is a lot of technology that gives FIs better control and the ability to incrementally embed compliance checks into their operating and reporting solutions. However, FI businesses need a new enterprise architecture to move from analogue structures and to implement a digital service environment that is truly and incrementally regulatory compliant. Getting control over all definitions of actors in the business eco-system and how they relate to each other is the obvious starting point. It will enable efficient use of RegTech products in a competitive operating digital environment.
Explore further insights on InsurTech and RegTech in our latest publication Next Wave of FinTech