A scary prospect, but one raised by a new report by financial services management consultancy Parker Fitzgerald.
Why could technology increase financial services risks?
The report believes that it could increase risks from non-compliant conduct and financial crime; create a greater inter-dependency between financial and non-financial risks; and be a potential threat to financial stability.
Technology delivers a new banking reality
The report, Safeguarding Digital Transformation: Understanding the Digital Impact on Banking Business Models and Risk Management cites a number of reasons that technology is causing a seismic shift in banking:
- Adoption of fintech is creating a widening gap between business aspirations and operational reality in financial services, with the systems and infrastructure at established banks often incompatible with rapidly-evolving digital expectations
- Digitalisation has made banks’ supply chains more complex, creating a challenging environment for their controls and oversight processes
- The increase in non-bank market participants – those from outside the financial sector taking on financial roles, due to changes in regulation and technology – is widening the provision of banking services, at times ‘beyond the reach of industry regulators’
A focus on governance over growth
Since the global financial crisis, almost a decade ago, regulators have tried to raise standards, largely by introducing more stringent rules around conduct, robustness and transparency. The result of this has been a tsunami of legislation.
Banks have focused on meeting their compliance requirements, and increased stability has largely been achieved. But, as the report notes, ‘too much stability, in the form of too much regulation, risked choking innovation and profitability’ and ‘the heavy compliance and litigation burden has distracted banks from seeking new avenues of growth’.
New threats have emerged – new competitors in the form of start-ups and challenger banks. The Financial Conduct Authority (FCA) has supported the growth in innovative approaches, via its Advice Unit, which provides firms with regulatory feedback on new automated models and by creating a New Bank Start Up Unit, designed to help new banks to enter the market.
And although you don’t have to be a start-up to be a disruptor, many incumbent banks have been caught on the back foot. While they have been focused on meeting regulatory demands, a new slew of competitors are increasingly driving choice and innovation.
How can established banks compete in the digital landscape?
The report sets out some strategies for banks wanting to up their digital game. It notes that: ‘A full-scale transformation – profound changes to business activities, processes and models using digital technologies and capabilities – is key to sustainability over the longer term.’
To make the most of the technological opportunities available – and minimise the risks – banks need to:
- Close the gaps between their digital aspirations and their legacy IT systems – which are often sub-optimal in terms of supporting digital transformation. This might mean:
- Reducing their reliance on legacy systems
- De-cluttering and decommissioning redundant systems
- Using analytics to measure key non-financial risks
- In some cases, create an entirely new digital bank alongside the legacy bank
- Ensure scalability allows the most efficient and effective adoption of new technologies, like the Cloud
As the report says, ‘Those that embrace a transformation agenda and manage the inherent risks that come with that are likely to be the banks that thrive in the longer term’.
What should you be doing to embrace digital without increasing your risks?
Parker Fitzgerald’s CEO, Scott Vincent, believes that ‘It is not inconceivable that the next financial crisis may emerge from the technology sector. This calls for a harmonisation of technology standards and a greater regulatory coordination across industries to safeguard financial stability.’
If you want to embrace digital while managing the risks, you need to ensure that you whatever innovation you undertake is done in a compliant way.
Key to this is working closely with your Compliance team to understand what you can and cannot do in terms of innovation. And because the rules are constantly changing you need to keep up to date. Upcoming regulations like MifID II add to your compliance burden and need to be considered alongside existing requirements.
It’s also worth considering the benefits of automating some of your marketing and compliance processes. Making the most of automation can help you to innovate while minimising the risk of regulatory breaches – one reason why financial services firms are increasingly adopting marketing automation tools.
Keep up with your changing responsibilities
Digital technologies are undoubtedly having a significant effect on the UK banking landscape. For Marketing teams, this is just one of the evolving challenges you face.
Source: Perivan Technology
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