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May 4, 2020updated 31 Jan 2022 10:02am

Banking & Payments Predictions 2020: Compliance

By GlobalData Thematic Research

Compliance refers to retail banks’ central function, processes, and procedures for complying with the increasing number of regulations across AML, KYC, capital adequacy, data management, sales, etc. The number and nature of these regulations will force leading banks to fundamentally adapt their operations to new regulations, which will increase costs and operational risk, and reduce efficiency.

Listed below are the top compliance predictions, as identified by GlobalData.

Retail banks carry a heavy compliance burden, far higher than any other industry. In 2020, the number and nature of these regulations will force leading banks to fundamentally adapt their operations to new regulations, as trying to implement these regulations on existing workflows will only increase costs, reduce efficiency, and increase operational risk.

Already in wealth, the likes of MiFID have driven some firms to exit the industry entirely, conferring an advantage on some startups, while disadvantaging others that don’t have a mature compliance function. Point being: the actual impact of any regulation depends on how individual firms respond.

To deal with spiraling costs, banks will engage further with regtech firms and outsourcing. Regtech firms are focused on developing solutions in data collection and reporting, decision-making, predictive analytics, and risk identification and management. However, because regtech can be highly specialised, best-in-class regtech in a given 50-step bank process might require 10 different regtech partners. Incumbent banks aren’t set up to work like that. Integration issues will afflict regtech partnerships much like they did fintech partnerships before them.

Regtech providing simple dashboards to stay on top of multiple initiatives will gain most traction. ING and Commonwealth Bank, for example, are working with Ascent, which uses AI to update clients on regulatory changes impacting their business and automatically generates audit reports and dashboards.

The cost of getting it wrong was so painfully demonstrated by Danske in 2019, which set aside $8bn to cover likely fines for a $235bn money laundering scandal. This resulted in the resignation of CEO Thomas Borgen, its share price more than halving, and the closing of its operations in Estonia, where the scandal occurred.

To get ahead of things, banks will work less on traditional regulatory lobbing and more on ecosystem strategies, working with other banks, regtechs, and regulators worldwide to form global, regional, and national consortia to better manage regulatory compliance.

As banking goes deeper into data-driven business models, 2020 will see data management become the biggest compliance issue across open banking and GDPR. Rather than to minimise compliance, leading banks will develop a strategy that clearly articulates appropriate (and inappropriate) uses of data.

This is somewhere that banks will seek to win the moral, legal, and thus consumer argument against Big Tech. These companies are forging pure ad business models for the collection, sale, and use of personal data and which are designed to optimise the user’s attention to the detriment of data privacy. In the European Union, data privacy has been the main focus of regulation over the last year, with adfunded platforms like Google and Facebook being targeted. Banks will stay ahead of this.

This is an edited extract from the Banking & Payments Predictions 2020 – Thematic Research report produced by GlobalData Thematic Research.