Banks are faced with a real conundrum. They are expected to deliver relevant and innovative new services to a discerning customer base and, at the same time, are facing an ever-tightening regulatory regime. However, the astute institution could view these regulations as an innovation enabler rather than an innovation killer.
The rise of the alternate lending and FinTech sectors has placed significant pressure on banks to deliver engaging new products. What’s more, the expectations of digitally savvy customers, who are used to a frictionless customer experience when shopping online, for example, weigh heavily on banks’ product development teams.
To add to the banks’ challenges, there is no doubt that financial regulations have become more onerous. Directives are becoming both more complex and intrusive as major institutions now operate in multiple regulatory jurisdictions and regulators are requiring increasing amounts of granular data.
Guidance around Know Your Customer (KYC), including the regulations that aim to combat money laundering and the finance of terrorism, are just a few of the many requirements which need to be adhered to. Both the EU and the United States are taking no chances as they clamp down on banks around these and other regulatory infringements.
A good example of how some of the more arduous requirements could be stifling innovation was seen in Singapore. The Monetary Authority of Singapore’s especially stringent Technology Risk Management Guidelines requires that every transaction within a batch be digitally signed by corporate finance officers, something that is almost unmanageable using one-time passwords.
The knock-on administrative effect, particularly for super-regional banks, was enormous, adding thousands of additional man-hours to comply and arguably cutting into time better spent on developing new products.
Innovating around regulations through technology
Agile fintech companies do, for the moment, enjoy a much more light-touch regulatory environment. This has allowed them to design new products and roll them out quickly to an eager customer base. But agility is something banks need not sacrifice because they face greater oversight. By adopting a similar attitude to innovation, they can just as easily grasp the opportunities new technology presents to delight their customers with convenient and truly engaging offerings.
An example of using regulations to innovate can be seen in South Africa. The Authenticated Collections Project has been implemented to address abuse of the early debit order system and requires all relevant debit orders to be electronically confirmed by consumers.
This requirement could be viewed as a problem. We believe, however, that local banks could use this as an opportunity to provide an authenticated collections service to merchants – deriving new revenue and providing excellent value for their business customers.
It takes a shift in attitude
Banks have a significant advantage over the new entrants. While FinTech products may attract users with their snappy designs and one-click convenience, banks have decades of institutionalised trust behind them. You are not likely to see a customer deposit their salary into their PayPal or Apple Pay account, but they will certainly trust their wages with a bank.
Moreover, all global regulators are focussed on protecting the consumer. This includes stringent security requirements and standards around payment authentication. This may seem like a pain point, but once banks have properly secured their digital channels, they effectively own a new means of interacting with their customers in real time and, most importantly, offering them additional services.
Regulations may seem onerous, but banks that take a progressive view will see the opportunity in not only adhering to regulations, but using them as a catalyst for creative thinking. Working with partners who are similarly driven by big new ideas and as invested in R&D will allow them to leverage their established brands, reputations for trust and economies of scale to compete with the most nimble of new entrants.