A report published by Nasdaq and Boston Consulting Group in late January suggested that targeted enhancements in banks’ risk and compliance functions could reduce risk and compliance expenditure by up to 20%.
According to Leo Gil, VP of Product Management for treasury at Bottomline, that could be a conservative estimate if operational costs related to employees, system maintenance, efficiency improvements and regulatory compliance – along with the potential missed opportunities from poor customer experiences, missed competitive plays, data security risks and lost revenue – are taken into account.
“Our experience with existing and prospective customers is that for the majority of banks, risk and compliance services are still provided via a scattered and loosely integrated infrastructure,” says Thomas Lederer, Senior Manager Solution Consulting Europe, Treasury & Capital Markets at Finastra. “By moving away from disparate tools and spreadsheets towards a robust solution that enables automation, banks can benefit from reduced manual interventions and operational risk.”
Through microservices architecture and modern APIs, institutions can further increase their agility with the ability to quickly onboard new services in response to market, regulatory or business demands.
Neil Katkov, Director Risk at Celent is a little more guarded, noting that although technology can improve analytics and help automate processes, it is very difficult to reduce costs.
“Deep learning (an advanced machine learning technology) can increase the accuracy of suspicious activity detection systems by up to 50% and generative AI can improve on this by 15% or more, which means that anti-financial crime analysts at banks would have to decision fewer alerts,” he acknowledges. “However, a backlog of compliance-related activities such as investigations, reconciliation, look-backs and yesterday’s alerts will keep analyst teams busy.”
Moreover, new regulations and more strictly applied regulation is constant and requires additional technological and operational capabilities.
The Nasdaq/Boston Consulting Group report found that financial institutions are turning toward strategic technology partners that offer holistic solutions to their biggest risk and compliance challenges.
Adam Gable, Senior Product Director at Temenos observes that many banks still use inefficient legacy systems which lack proper interfaces and have limited or siloed datasets with different systems required for risk and regulatory monitoring and reporting.
“Industry leaders are increasingly adopting more tightly integrated solutions to modernise their risk and compliance function,” he says. “These solutions enable real-time data tracking, workflow automation, the use of AI/machine learning tools for driving efficiency and adoption of agile frameworks to quickly adapt to regulatory shifts.”
As the regulatory landscape and compliance demands continue to evolve, macroeconomic risks become more difficult to navigate. Another challenge is that as banks grow, knowledge often becomes scattered across various departments and there can be a lack of joint ownership over similar risk functions.
“By implementing an end-to-end, best of breed and cloud-based treasury system, banks can streamline their risk and compliance functions while having the agility to evolve with new demands,” adds Lederer.
Reducing complexity for treasury teams rests on prioritising automation and auditability, whether operationally or around regulatory mandates. Banks have strict credit and lending obligations, including regulations regarding the volume and value of deposits, explains Gil.
“These deposits are often spread across disparate systems such as asset and liability management systems, payment systems, legacy systems and even spreadsheets,” he says. “Treasurers often face the onerous burden of manually collating this data, leading to inaccurate forecasts and unnecessary risk for the bank. Factor in fraud prevention measures and sanctions compliance and it is clear just how critical automation in policies and workflows has become.”
Top-down consolidation of risk and compliance systems and processes is a huge change project and banks seldom take this path. Fortunately, there are some technology approaches that can help reduce complexity and improve analytic outcomes relatively quickly.
“For example, KYC requirements are handled through a patchwork of systems and processes that have evolved over time including identity verification, sanctions screening and entity risk assessment and for business customers, entity classification, corporate documentation and beneficial owner analysis,” concludes Katkov. “These elements need to be monitored and updated on a periodic basis.”
