The banking industry is going through a tectonic shift and 2023 is set to become one of the most exciting years in the banking events. The market downturn and economic volatility, the emergence of fintech and neo-banking, all have set the notion for unprecedented and uncertain times ahead.
The global economic outlook seems to be gloomy as we get ready for 2023. With high inflation, all the middle-income and developing nations are gearing up for more difficult days as the IMF has projected a growth rate of a mere 2.7% in 2023. Specifically in the banking sector, with the arrival of new players, the competitive landscape has become more intense than ever and is forcing traditional banks to rethink their value proposition for business. With a plethora of data breaches popping up almost every day and heightened privacy concerns, compliance risk management for banks will become more restrictive and stringent along with the need for new risk and audit management processes. Let’s delve deep to understand the present challenges in the current landscape and the emerging trends for 2023.
From AI-enabled wearables that monitor users’ health to thermostats powered by smartphones, which allow users to customize the settings of connected devices, technology has become an integral part of our culture and the banking industry is no exception to that.
In the digital world, there is no room for manual processes, and systems are being replaced by automation. Banks and credit unions need to think about modernizing archaic systems and processes with technology to address modern-day challenges. For this, financial institutions must foster a culture of innovation, in which technology is used to optimize existing processes and procedures for maximum efficiency.
This cultural shift towards a tech-centric mindset reflects the increasing acceptance of digital transformation across the industry.
Modern-day financial and banking institutions require a new set of compliance frameworks and risk and audit management processes. Financial service companies are intensifying their efforts to improve the effectiveness and sustainability of compliance in response to changing regulatory expectations. The Federal Reserve’s SR08-08 updates are expected to provide guidance on board culture, conduct, roles and responsibilities, and technology compliance.
Additionally, the need for extensive oversight of sales and business practices and enhanced governance of compliance risk management for banks is leading organizations to employ advanced analytics and technology in their compliance efforts. Financial services firms must demonstrate compliance with program sustainability through enhanced monitoring, testing, and accountability. Many organizations are turning to compliance automation tools that offer operational value, increased efficiency, and reduced costs by making compliance an increasingly integrated part of a business strategy with a future vision.
Regulatory compliance has become one of the most significant challenges in the banking industry. As direct aftermath of the exponential increase in regulatory fees relative to lending gains and losses since the 2008 financial crisis, from Basel’s risk-weighted capital requirements to the Dodd-Frank Act and from the Financial Accounting Standards Board’s Current Expected Credit Loss (CECL) to Allowance for Loan Losses and leases (ALLL), there is a growing number of regulations that banks and credit unions must comply with. Compliance can be a significant drain on resources and often depends on the ability to correlate data from disparate sources.
Some of the regulations include:
Basel III was published in 2009 and is a regulatory framework for banks, introduced by the Basel Committee on Banking Supervision. Basel III risk-weighted capital requirements mandate the minimum capital ratio that banks must meet.
The Dodd-Frank Reform Act was introduced during the Obama administration by Wall Street and consumer protection regulations for the financial services industry and created programs to prevent predatory lending.
The CECL was developed by the financial accounting standards board. It is an accounting standard that requires all institutions that originate a loan to allocate expected losses over the remaining life of the loan instead of actual losses to calculate.
ALLL is a reserve that financial institutions set aside based on the estimated credit risk in their assets.
Faced with the severe consequences of financial default, banks have incurred costs and additional risks to stay up-to-date on the latest regulatory changes and to implement the necessary controls to meet those requirements. To meet regulatory compliance challenges, banks and credit unions must foster a culture of compliance within the organization and establish tech-enabled formal compliance systems and structures.
The costs associated with compliance management are just one of many banking industry challenges that are forcing financial institutions to transform the way they do business. The rising cost of capital combined with low and persistent interest rates, declining returns on capital, and declining proprietary trading are putting pressure on banks’ traditional sources of profitability. Despite this, shareholder expectations remain unchanged.
This combination of factors has prompted many institutions to create new competitive service offerings, streamline lines of business, and seek sustained improvements in operational efficiencies to maintain profitability. Financial institutions need to be structured to be agile and adaptable for every possible business landscape.
Data and analytics are transforming the banking industry in multiple aspects. Data being the new gold, every financial organization is leveraging the pile of data they are sitting in and new-age banking institutions and fintech are frontrunners in it.
To remain competitive in 2023 and beyond, banks should leverage data analytics for innovation and improvement in several key areas, including:
Data has become extremely crucial for modern-day risk identification, risk management, and risk mitigation strategy. In this regard, the technology will go hand-in-hand with the data strategy for seamless integration and data availability across the organization to provide enhanced data protection and privacy, analytics, and resiliency.
Various back office and mundane services including customer-centric chatbots, credit decisions, advanced fraud detection, risk modeling, and regulatory compliance are now being automated and optimized using artificial intelligence. Several banks have partnered with fintech companies to improve their AI operations, and the insights should be used to bolster their operational efficiency in 2023. While the back-end implementations serve as test cases for AI, future applications might include SEO, lead generation, traditional marketing activities, and sales closing as well.
Mobile and digital payments have been game changers for many fintech companies and have played an important role in transforming banks into transaction processors. Banks should take the step of developing super apps that create customer value for an entire ecosystem.
Identifying the niche and apt segments that require unique solutions is the key to success in this transaction-based game. The key to differentiation would be the development of superior products catering to varied customer needs.
Central bank digital currency has the potential to replace the existing UPI/NEFT payment infrastructure. The Chinese digital yuan has already surpassed $14 billion in transactions, giving regulators access to transaction-level data. Consequently, this could represent a longer-term shift of big data from banking/fintech databases to central bank databases across the globe.
After the pandemic, customers have higher expectations for online and traditional banking.
As rising inflation puts pressure on household budgets, banks need to adjust their service offerings and seek greater levels of personalization. Additionally, the success of lending platforms shows that customers become more loyal when banks reward customer loyalty through data-driven solutions.
With the consistently increasing complexity of the risk and audit management process, integrated risk management (IRM) is the much-awaited solution for banks to address the holistic risk management identification and management approach.
Using IRM, risk managers can shed light on the foreseeable and current risk factors along with insights and risk weightage. These insights pave the way for more informed decision-making at the leadership level.
The benefits of integrated risk management for banks are:
Banks are laden with multiple risk factors such as data fraud, money laundering, consumer data privacy, and stringent financial regulations that go way beyond traditional banking activities. They need to sail through the challenges thrown at them through efficient risk management processes to ensure compliance and add value to their customers and stakeholders.
VComply’s compliance and risk management platform for banks automate compliance processes for banking institutions so that they can keep up with regulatory changes.
The two key features of VComply compliance risk management for banks are:
It would be interesting to see how banks would optimize their operational frequency with technology and stay abreast with regulatory changes and compliance frameworks. While there are many uncertainties, one thing we know for sure is that the use of compliance and risk management solutions for banks would automate compliance processes.
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