by Adam D. Wisniewski
Senior Manager, Management Consulting Services
September 13, 2018
Banks can spend up to 10 per cent of their operating costs on compliance – making an annual global total of approximately $270bn [i]. All too often this spend is seen as necessary rather than strategic. Given the type of business change so often demanded by new regulations, banks should see their arrival as an opportunity to rethink their processes, and even their business models, to gain competitive advantages. Here are five areas where this approach works.
A bank’s reputation is its biggest asset and protecting it is money well spent. Being caught short regarding regulations can result in adverse publicity, rapidly undermining a hard-earned reputation. So while much of today’s regulation is ostensibly about minimising risk, by complying effectively banks protect, even burnish, their standing among clients – business and private. Never is this more true than when it comes to suitability – ensuring the client gets the right advice about the right products.
Risk was previously borne by the client but today’s regulations mean it is up to a bank selling to European customers to ensure that any product or advice offered is suitable and that the client has been properly advised. If it can be proven otherwise, the client can sue and the bank will have to compensate. High-profile cases include the €45m payout by Brazilian bank J. Safra Sarasin to a German customer in compensation for incorrect investment advice.
While grievances are still quite rare thanks to a relatively benign environment of rising stock markets, today’s bull run will not last forever. When it turns and more clients lose money from their investments, complaints will rocket and banks should be ready.
Orbium’s own research shows that a substantial number of complaints received by banks are already about suitability and that only one in five are confident they can quantify the risk related to non-compliance. By ensuring compliance across the board, banks will protect their reputations and, therefore, their businesses.
Many new regulations require that banks collect far more personal information about the customer, for example for suitability compliance. While this presents an additional layer of bureaucracy for the bank and also demands more of the client, the additional data allows the bank to get to know the customer better and therefore provide an enhanced service. Using the data effectively, the relationship manager should be able to forge a closer link to the client, offer more appropriate products and provide value-added experiences such as networking events around their particular interests.
This helps banks meet the ever-higher expectations of their customers who – increasingly used to customer-centric services from the likes of Spotify, Amazon, Netflix and Google – now demand a more personal service tailored to their specific needs.
Compliance is made a lot easier with correct, up-to-date, easily retrievable data. Many banks have already reorganised or plan to reorganise their databases and clean up their data sets. But it’s not just compliance that benefits. When analysed properly, this data can be used to help build loyalty, cross sell, up sell, cut costs, improve efficiency and even produce new revenue streams.
What’s more, data analytics brings automation and audit trails, cutting both costs and risk. And as new regulations come down the line, banks will already have clean data sets from which to work, making adapting to them far easier and quicker.
Regulations and customer expectations are pushing banks into more complex business environments. With real-time banking, 24/7 access, online, m-banking, straight-through processing and account aggregation, as well as complying with anti-money laundering, mis-selling and transparency requirements, banks are having to do more – often on lower margins.
Where before a bank’s IT department would write and maintain its systems, often taking months or even years to develop and introduce new technology, today that approach is simply not effective. It’s too difficult, slow and expensive. Instead, we are increasingly seeing banks turn to packaged software providers, fintechs and specialist service providers to supplement – even replace – their existing infrastructure.
The benefits include lower cost, lower risk, faster roll-out of new services and more cutting-edge technology, making the bank more nimble. For example, working with cross-border compliance specialists such as indigita, the bank gets access to up-to-the minute digital advice that it couldn’t possibly maintain on its own.
By considering and implementing the above, banks will create strong and scalable technical platforms and processes as well as agile and responsive structures. These can be used to develop new business models and generate new business streams.
UBS already provides risk and compliance services to smaller competitors, while Commerzbank is in the process of becoming a “digital financial service provider”, investing heavily in digitising the whole bank. In the medium to long term, it too expects to sell its solutions to smaller players.
But it’s not just the big players. Smaller banks too will find opportunities to provide services beyond their traditional businesses, possibly by opening up to competitors or by forging new partnerships. Facebook, for example, just recently (August 2018) announced its intention to pursue reciprocal deals with banks about sharing dataii .