Think compliance is expensive? In the age of open banking, it’s your smartest investment

In an increasingly competitive mobile-first world, it’s time for banks to be ethical with the data customers entrust to them – obeying relevant rules and regulations, as well as leading the way in delivering best practices in customer service and convenience. Otherwise, customers will vote with their feet and take their business to those financial institutions that do.

Even so, some of the bigger, well-established banks readily pay fines for misusing customer data, believing the expense of the fine is much less than the cost of conforming to new regulations designed to protect that data. These institutions are willing to pay, not only for charges related to meeting data protection regulations, but also for their failures in KYC and AML initiatives. In reality, costs are much deeper than large fines and include lasting damage to reputation and customer trust. This can no longer be accepted as a long-term strategy for any bank.

Instead, these large, legacy institutions need to start acting like challenger banks or fintech start-ups, adopting agile development strategies to meet the needs of increasingly mobile customers and more stringent compliance requirements. Without this approach, these groups risk being outflanked by their leaner and more efficient competitors – embracing technology to effectively manage compliance, customer service, and industry reputation as simultaneous priorities.

Recent research highlights the need for this shift, with many in the industry demonstrating slow implementation of new regulations. An excellent example is the open banking concept, in which financial information is shared, electronically and securely, through open APIs that enable third-party developers to build applications and services around the financial institution. By March 2019 European banks were required to have implemented facilities so that third party providers could test their functionality against a simulated bank environment or “sandbox.” This deadline came and went with a significant percentage of financial institutions failing to comply. A survey of 442 European banks across ten countries found that fewer than six in ten (59 per cent) had completed the work in time.

It is on this landscape that research also finds a growing demand for banks to have a socially good or ethical stance baked into their business models. A recent report into The Future of Money, carried out by the Innovation Group at J Walter Thompson Intelligence, revealed 76 percent of Chinese and 65 percent of US consumers stated that over the last five years ethical behaviour has become more important when choosing a financial institution.

In an age of digital and social media, it is much more problematic for banks to stumble in meeting legal requirements and expect news of it to quickly disappear. Most importantly, news can spread very quickly to anyone with an internet connection. Secondly, once on the web, that negative news crops up in searches by prospective and existing customers – delivering long-term damage to any ethical credentials.

In addition to protecting ethics and reputation, compliance is more important than ever in a period of rising financial crime. In recent research carried out by AITE Group, executives from US financial institutions and financial crime executives indicated that 13 billion data records were stolen or lost in the US since 2013. This is in turn driving increased application fraud, anticipated to cost US banks $2.7 billion in credit card and DDA losses in 2020, up from $2.2 billion in 2018. An important way to help prevent these losses is to embrace the existing rules and regulations. 

Today, there’s no legitimate excuse in avoiding regulations or refusing to implement best practices in compliance, particularly around data. Cost-effective tools deliver effective ID verification, ensuring KYC and AML compliance on a global basis, while keeping customer data up to date and enriched. Artificial intelligence (AI) and biometric tools can aid effective data compliance as well. Most importantly, banks don’t need to ‘rip and replace’ their legacy systems to capitalise on these significant advancements in data technologies. They simply need to identify the functionality necessary for compliance and work with third-party solutions providers to tap into powerful new tools grounded in API-led connectivity. Working side-by-side with existing banking platforms, these smart, sharp tools solve problems that no bank can afford to ignore.