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Regulatory Compliance and Banks:

Key Challenges and Effective Solutions

WHITEPAPER

Written by Tathagata Kandar, Lead, Strategic Marketing, SunTec Business Solutions


Regulatory Compliance and Banks: Key Challenges and Effective Solutions WHITEPAPER

Introduction
Compliance is big business. The approximate amount of relief to customers
from the Customer Finance Protection Bureau, enforcing customer
protection laws, is a staggering $10.1 billion (2011-2014). This includes $2.6
billion in restitution to consumers; and$7.5 billion in principal reductions,
cancelled debt, and other consumer relief.

This is money that could have found a place in banks' bottom line.

Regulations are integral to the banking industry, and the extent to which
the bank complies with such regulations not just maintains its bottom line
in terms of avoiding hefty fines, but also has a big bearing on credibility and
integrity.

So how do banks comply with all that is required, and save themselves
from the ill-effects of non-compliance?

The following four broad steps is the way to go:

Understand
l all regulations
Incorporate
l compliance into core business processes
Ensure compliance does not shut shop. In other words, make sure
l
implementation of regulations does not impede regular business
operations
Ensure that compliance does not come at the cost of customer
l
satisfaction

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Regulatory Compliance and Banks: Key Challenges and Effective Solutions WHITEPAPER

Key Challenges
Compliance is not a smooth and SEPA:
l The Single Euro Payments on the sustainability of a bank’s
straightforward affair, as the sheer Area (SEPA) makes it binding on bottom line.
number of non-compliance cases banks to offer customers the
show. Here are the top challenges same uniform basic conditions,
bankers face when trying to comply rights and obligations when they
Inconsistent
with regulations: make payments anywhere in the
Eurozone, regardless of their
Standards
location. For instance, a credit
Huge Volume of card holder in Germany could
Even as banks grapple with an ever-
increasing number of regulatory
Regulations make payments in Spain, just as
he would do in Germany. While
requirements, the problem of
inconsistent standards compounds
this offers a world of
The 2007-08 financial crisis brought the difficulty.
convenience to customers, it
in new regulations, mostly intended
denies banks an opportunity to
to infuse transparency in financial Banks mostly hit this roadblock
collect additional fees and
systems, and ensure that banks when they try to globalise.
charges for international
maintain adequate capital. Complying with different regulations
transfers, a stable source of
in different regions adds to the cost
income, and standard business
However, ironically, the weight of of banking, and as banks pass on
practice across the world. At the
these requirements itself causes a these costs to customers, the
time of implementation, the
strain on the banks. impact is felt across the eco-system.
payment revenue(account for as
high as 15% of the bank’s profits)
It is estimated that by 2020, all Regulations like the International
estimated to be foregone across
the regulations passed since Financial Reporting Standards (IFRS)
all banks, stood at $108 billion.
aims to standardise and improve
the 2009 Pittsburg meet of G20 The Directive on Payment
l
safety and transparency in business
countries would be equal to a Services (PSD) establishes the
and financial dealings across
legal groundwork to create a
pile of papers three times the international boundaries. The goal is
European Union wide single
size of Eiffel Towers, and that it to increase the quality of
market for payments. It lays
would take a dedicated reader information provided, and to reduce
down a comprehensive set of
the complexity involved.
650+ years to simply read rules, applicable to all payment
through all of these services in the European Union,
Though there is a move to bring in
making cross-border payments at
regulations level playing fields in terms of
par with 'national' payments.
capital, liquidity, and leverage across
Again, while customers benefit
Not all regulations apply to the board, there will always remain
greatly, the challenge for banks is
everybody though. While some considerable differences in
to overhaul their systems and
regulations pertaining to Know Your requirements, especially with regard
procedures to comply with these
Customer (KYC) and anti-money to scope of application, and timing
directives.
laundering (AML) are applicable of implementation from one
across the board, many regulations jurisdiction to another.
Both these regulations force banks
relate to capital markets, some
to change their business
legislations aim at protecting While it may take time before all
procedures, impacting operations.
customers from rapacious charges, financial institutions get on board
For instance, one of PSD’s aims is to
and some others focus on creating a with the same set of accounting
open up payment markets to new
conducive environment for banking. standards (the US is still holding out
entrants, making competition more
Some of the major regulatory on adopting this), technology can
cut-throat. Overall, SEPA and PSD
requirements for banks include: help increase the adoption rate,
don’t just put pressure on margins,
they also pose a further challenge while ensuring safety and
transparency.

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Regulatory Compliance and Banks: Key Challenges and Effective Solutions WHITEPAPER

Regulations also stand in the way of


Knowing What to innovation. The more time and
Data Overload
Comply With and money the bank has to spend on
compliance, the less resources it has In today’s age of big data, data is
How to innovate, and further their always in excess, and banks are no
exception. Unless there is a proper
business model. Banking is a zero-
sum game, and resources and effort mechanism in place to cull relevant
Compliance regulations fall into
in one area come at the cost of data from the mass, data overload
three broad categories:
another area. can subvert the bank’s systems.

Policies
l already announced and
Banks generally use their Banks need data to get a 360 degree
at implementation stage, such as
discretionary spend to attain cost view of their customer. However,
Basel III requirements
reduction, improved efficiency, most banks, with their legacy
Policies taking shape and which
l
customer service enhancements, architecture, use dated batch-driven
will be implemented in the near
new market entry, and product data, which is not in real time. The
future. Banks need to get their
launches. The increase in data on hand is reactive as well,
systems and procedures ready,
regulations leave many banks with based on what customers did in the
in time
less money on such discretionary past,and this is of little use to
Policies at an early stage of
l
spend. On an average, 57% of the predict customers’ changing
development, at national and
banks’ discretionary budgets was behavioural patterns. Moreover,
international levels, with
spent on mandatory projects in customer data lies fragmented
uncertainty over their final
2013, and in 2014, this figure across myriad systems, channels,
shape. Banks may want to start
remained more or less geographies, and other dimensions,
complying with the spirit of such
consistent, at 54%. creating problems in collating and
legislation, without going into
consolidating data on specific
specifics
customers. It leads to an ironical
situation, where banks have the
At another level, banks also need to
maximum information on their
be aware of when a specific
customers, but minimal
legislation or regulation would apply
actionable data.
to them.

Clash with Business


Goals
Statutory compliance, especially the
latest ones legislated in the wake of
the 2007-08 financial crisis, are
intended to strengthen the industry.
However, at times, such compliance
directly comes in the way of the
bank’s ability to do business, and
impedes competitiveness. A case in
point is the Basel III regulations
relating to capital requirements and
requirements for increased liquidity.
Such requirements undoubtedly
make banks more resilient, and less
likely to fail, but it also means
less leverage.

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Regulatory Compliance and Banks: Key Challenges and Effective Solutions WHITEPAPER

So how do banks
tackle these
challenges, and
remain competitive?
transparency laws that make it
Better Controls
. imperative for banks to maintain
logs for all transaction related
Better control equates to observing entities.
proper standards of market
conduct. Bankers could implement
controls at three levels: Improving Asset
1. Business line management
Quality
2. Adding a risk management and
compliance layer to the process Banks need to improve their asset
3. Internal audit efficiency. Compliance
requirements such as minimal
The easiest and least-disruptive capital requirements and contra-
layer is at the business line capital force banks to become more
management. Here, banks need to: responsible with their assets, which
they need to use optimally to
Implement
l the required controls remain competitive. Improving
at the operational layers, and asset quality invariably involves
test operating procedures to enhancing data quality, so that silos
ensure that they work as they are broken down, data becomes
should. accessible, and full transparency
Protect the integrity of their own
l
sets in. This, in fact, clears the path
systems from hackers and other for big data analytics, offering
cyber criminals looking to steal banks an opportunity to tackle
data shortcomings in management and
Improve adherance to anti-
l
technology, reduce costs for
money laundering (AML) and collecting and reconciling data, and
“know your customer” (KYC) rules improve risk management.
in operational procedures
Banks need to derive insights from
Automated workflows could ensure their usage data, and when doing
compliance, and make it easy to so, focus on understanding exactly
identify potential fraudulent what is required for the customers.
patterns. Extensive, automated, One way of going about it is by
built-in approval mechanisms also instituting a business architecture
help banks function in a more agile layer that delineates the customer
but safe manner. All these would be facing layer from the underlying
in tune with the prevailing operational systems, and offers
real-time, high volume data

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Regulatory Compliance and Banks: Key Challenges and Effective Solutions WHITEPAPER

analytics that enables decision


making, even as it orchestrates
transactions and services
simultaneously. This will make the
current legacy core architecture
irrelevant in delivering customer
experience.

An incidental benefit of having


all customer data in real-time
is that it will enable banks to
become more agile in their
reactions to the changing
regulatory needs. Banks can
report on customers or
segments in a more
transparent and easy way.

Developing a
Customer
Compliance
Business Model
Banks, like any other business, focus
on the customer, but instead of a
purely “customer centric” model,
they should promote a “customer
compliance business model” that
rewards the customer for
compliance with the systems in
place. The system still remains
flexible, as long as all regulatory
requirements are met.

Banks could devise solutions on top


of existing systems, to capture
compliance requirements inside the
core processes itself, rather than go
for an overhaul every time
regulations change. Digitalization,
with a focus on flexibility, and role
based portals that offer data in a
contextual manner helps banks in
this regard. Banks could create
innovative offers that come with in-
built compliance from the
customers’ side. The bank could
reward such compliance with loyalty
points that motivate customers to
use this option.

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Regulatory Compliance and Banks: Key Challenges and Effective Solutions WHITEPAPER

Conclusion
With regulators determined to enhance enforcement, increasing punishments for violations, and making senior
managers personally accountable, banks are turning to technology to supply them with tools that will help them
co-opt the requirements into their internal business processes.

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