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Achieving operational resilience: A guide for the banking sector in the face of regulatory change

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Michael D’Onofrio, CEO, Orbus Software

 

Prevent. Adapt. Respond. Recover. Learn. These are the five goals set out by the Statement of Policy on Operational Resilience in 2018 on how financial services must overcome disruption.  As of March 31st 2022, regulated service providers need to comply with this statement.

While initiated before the pandemic, the global event has accelerated the need for regulators to take a more solid step in this direction. Now more than ever, there are increasing challenges financial services firms face in managing operational disruption.

It is clear from recent conversations with CIOs and Chief Information Security Officers within the banking sector that resiliency is a topic that is quickly moving up executive agendas.

Resiliency is more than just a word. It is becoming one of those overarching terms that focus on taking a more holistic perspective on behaviours, processes and technologies within a business. These all come together to support a digital operating model which sits at the heart of most businesses today.

Michael D’Onofrio

We think about resiliency as having four key parts:

  1. Clarity is understanding what you have now, and where you are going in the future. A business’ digital transformation journey is fundamental to understand where it is going in terms of clarity of purpose.
  2. Agility is knowing how you get there and being able to assemble technologies that exist within a business. An example of agility is when one of your sites goes down and both your people and data centre are offline. How do you rapidly and flexibly respond to that? How do you ensure you have agility around your operations, so you don’t get impacted at the same magnitude from these activities going forward?
  3. Reliability is where technology and business operations meet and are often complex. In the past, companies may have had on premise software that was relatively easy to manage. Now, businesses have hybrid environments: whether cloud, on premise, or a combination of the two. Reliability in this complex environment is hard to achieve.
  4. Sustainability means making the right long-term decisions for the business. This is not just in terms of technology and business processes, but also the environment too. For example, moving an on-premise application into the cloud has sustainability benefits due to the efficiency of the hyperscale data centres.

Businesses need to get these four elements right to be able to have a resiliency level that is mature, that can respond to external shocks, and that is also both effective and efficient in terms of internal operations.

Across the UK there’s an operational resiliency regulatory mandate kicking in. But US regulators have pushed for these changes many years before. Being a bigger market and having more resources, the US may be slightly ahead here. Having said this, it’s not so much that the US has gone first, and the UK and Europe are following, but that they’re both in a sort of continuous resiliency building activities.

Some think that resiliency is merely a risk management strategy. However, resiliency is more about adopting a strategic and operational mindset and taking a holistic approach to what’s going on. Security is a huge part of resiliency. The more we move to the cloud, the more complex the security posture becomes. How you’re going to respond is partly driven by the architecture that you’ve set up. A well-designed architecture is a resilient architecture.

Financial risks arising from climate change is also an important theme that needs to be considered in this context. Providing for the needs of current and future generations gives purpose to resilience, seeking better long-term outcomes. Sustainable decisions need to be made now to get ahead of the curve otherwise, we will always be playing catch up. Ensuring that you can deliver both internal operations and products and services to customers in a decade’s time is important.

There are many dimensions to diversity: talent base, workforce, executive teams should reflect that of the world around you. And for us, diversity refers to another part of the ESG or environmental, social and governance considerations of a business. An organisation should reflect its customers and the world which, of course, is a very diverse place.

Global events such as the pandemic have had a big impact on business resiliency. According to two MIT Sloan professors, the pandemic has taught us that “it’s not enough for organisations to excel at a steady state — they also must build the resilience to respond to irregular operations and conditions”.

This is where the four elements mentioned above come into play: you need to have clarity of where you’re going and the agility to be able to respond to these situations. According to Reuters report “Fintech, Regtech and the Role of Compliance in 2021”, 70% of risk and compliance experts said the pandemic has increased their reliance on technology to improve decision making, performance monitoring, and risk management.

However, while other software in your business – like transactional systems or payroll systems – need to be 100% accurate, Enterprise Architecture is often operating in the 80/20 range, sometimes with even less information. Knowing that you’re going to need to make decisions with imperfect information is a critical part of Enterprise Architecture.

Understanding where you are, what your challenges are, where you’re going, and the different parts needed to get there, is one of the ways that digital platforms and skills within your team, often sitting within the architectural strategy teams, can help you be more resilient.

 

Banking

Resilient technology is the most important factor for successful online banking services

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By James McCarthy, Director of Solutions Engineering, NS1

 

More than 90 percent of people in the UK use online banking, according to Statista and of these, over a quarter have opened an account with a digital-only bank. It makes sense. Digital services, along with security, are critical features that consumers now expect from their banks as a way to support their busy on-the-go lifestyles.

The frequency of cash transactions is dropping as contactless and card payments rise and the key to this is convenience. It is faster and easier for customers to use digitally-enabled services than traditional over-the-counter facilities, cheques, and cash. The Covid pandemic, which encouraged people to abandon cash, only accelerated a trend that was already picking up speed in the UK.

But as bank branches close—4865 by April of 2022 and a further 226 scheduled to close by the end of the year, Which research found—banks are under pressure to ensure their online and mobile services are always available. Not only does this keep customers satisfied and loyal, but it is also vital for compliance and regulatory purposes.

James McCarthy

Unfortunately, their ability to keep services online is often compromised. In June and July of this year alone, major banks including Barclays, Halifax, Lloyds, TSB, Nationwide, Santander, Nationwide, and Monzo, at various times, locked customers out of their accounts due to outages, leaving them unable to access their mobile banking apps, transfer funds, or view their balances. According to The Mirror, Downdetector,  a website which tracks outages, showed over 1500 service failures were reported in one day as a result of problems at NatWest.

These incidents do not go unnoticed. Customers are quick to amplify their criticism on social media, drawing negative attention for the bank involved, and eroding not just consumer trust, but the trust of other stakeholders in the business. Trading banks leave themselves open to significant losses in transactions if their systems go down due to an outage, even for a few seconds.

There are a multitude of reasons for banking services to fail. The majority of internet-based banking outages occur because the bank’s own internal systems fail. This can be as a result of transferring customer data from legacy platforms which might involve switching off parts of the network. It can also be because they rely on cloud providers to deliver their services and the provider experiences an outage. The Bank of England has said that a quarter of major banks and a third of payment activity is hosted on the public cloud.

There are, however, steps that banks and other financial institutions can take to prevent outages and ensure as close to 100% uptime as possible for banking services.

Building resiliency strategies

If we assume that outages are inevitable, which all banks should, the best solution to managing risk is to embrace infrastructure resiliency strategies. One method is to adopt a multi-cloud and multi-CDN (content delivery platform) approach, which means utilising services from a variety of providers. This will ensure that if one fails, another one can be deployed, eliminating the single point-of-failure that renders systems and services out of action. If the financial institution uses a secondary provider—such as when international banking services are being provided across multiple locations—the agreement must include an assurance that the bank’s applications will operate if the primary provider goes down.

This process of building resiliency in layers, is further strengthened if banks have observability of application delivery performance, and it is beneficial for them to invest in tools that allow them to quickly transfer from one cloud service provider or CDN if it fails to perform against expectations.

Automating against human error

Banks that are further down the digital transformation route should consider the impact of human error on outage incidents and opt for network automation. This will enable systems to communicate seamlessly, giving banks operational agility and stability across the entire IT environment. They can start with a single network source of truth, which allows automation tools to gather all the data they need to optimise resource usage and puts banks in full control of their networks. In addition it will signal to regulators that the bank is taking its provisioning of infrastructure very seriously.

Dynamic steering 

Despite evidence to the contrary, downtime in banking should never be acceptable, and IT teams can make use of specialist tools that allow them to dynamically steer their online traffic more easily. It is not unusual for a DNS failure (domain name system) to be the root cause of an outage, given its importance in the tech stack, so putting in place a secondary DNS network, or multiple DNS systems with separate infrastructures will allow for rerouting of traffic. Teams will then have the power to establish steering policies and change capacity thresholds, so that an influx of activity, or a resource failure, will not affect the smooth-running of their online services. If they utilise monitoring and observability features, they will have the data they need to make decisions based on the real time experiences of end users and identify repeated issues that can be rectified.

Banks are some way into their transformation journeys, and building reputations based on the digital services that they offer. It is essential that they deploy resilient technology that allows them to scale and deliver, regardless of whether the cloud providers they use experience outages, or an internal human error is made, or the online demands of customers suddenly and simultaneously peak. Modern technology will not only speed up the services they provide, but it will also arm them with the resilience they need to compare favourably in the competition stakes.

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Banking

Digital Banking – a hedge against uncertainty?

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Ankit Shah, Head of Digital Banking, Apex Group

 

The story of the 2020’s thus far is one of crisis. First the world was plunged into a global pandemic which saw the locking down of people and economies across the world. Now we deal with the inevitable economic consequences as currencies devalue and inflation bites. This has been compounded by Russia’s invasion of Ukraine and subsequent energy politics.

And the outlook remains uncertain. Tensions continue to build between China and Taiwan and inflationary conditions are forecast to continue well into 2023. This uncertainty is impacting everyone, and every sector. And finance is no exception with effects being felt everywhere from commodity and FX markets to global supply chains.

But it’s not all doom and gloom. Rollercoaster markets and an ever-evolving geopolitical situation have made 2022 a tricky year far, but, despite the challenges, digital banking has proven resilient. In fact, the adoption of digital banking services has continued to grow over the last few years, and is predicted to continue.

So, what are the forces driving this resilience?

In an increasingly digital world and economy, digital banking comes with some advantages baked in, which have seen the sector continue to succeed despite the tumult in the wider world. In fact, the crises which have shaped the decade so far may even have been to the advantage of digital banking. Just as during the pandemic, technologies which could facilitate remote working saw a huge uptick in users, so to digital banking is well suited to a world where both people, and institutions demand the convenience that online banking services offer.

And while uptake of digital banking services is widespread amongst retail consumers, a trend likely to continue as digital first generations like Gen Z become an ever-greater proportion of the consumer market, uptake amongst corporate and institutional customers has been slower. This is largely down to a lack of fintech businesses serving the more complex needs of the institutional market, but, in a post-Covid world of hybrid working business, corporate clients are looking for the same ease of use and geographic freedom in their banking that is enjoyed by retail consumers.

This is not just a pipe dream – with the recent roll out of Apex Group’s Digital Banking services, institutions can enjoy the kind of multi-currency, cloud-based banking solutions, with 24/7 account access that many of us take for granted when it comes to our personal banking.

Staying compliant

One significant difference between retail and business accounts however, for banking service providers, is the relative levels of compliance which are needed. While compliance is crucial in the delivery of all financial services, running compliance on multi-million pound transactions between international businesses brings with it a level of complexity that an individual buying goods and services online doesn’t.

For digital banking services providers, this situation is further compounded by guidance earlier this year from HM Treasury – against the backdrop of the Russia-Ukraine conflict- requiring enhanced levels of compliance and due diligence when it comes to doing business with “a high-risk third country or in relation to any relevant transaction where either of the parties to the transaction is established in a high-risk third country or with a sanctioned individual.”

So, can digital banks meet these standards while also providing institutions with the kind of easily accessible, mobile service which retail customers enjoy?

The answer is yes and again, once initial hurdles are overcome, digital banking brings with it features which give it the edge over traditional banking services. Paperless processes, for example, mean greater transparency and allow for better and more efficient use of data. This means AI can be employed to search documents, as well as provide verification. It also means compliance processes, often notoriously complicated, become easier to track. Indeed, digitising time intensive manual process means the risk of human error in the compliance process is reduced.

Digital banking can also better integrate transaction monitoring tools, helping businesses identify fraud and irregularity more quickly. This can be hugely important, especially in the times of heightened risk we find ourselves in, where falling foul of a sanctions regime could have significant legal, financial and reputational consequences.

Cross-border business

Our world is increasingly globalised, and so is business. For corporate and institutional banking customers, being able to operate seamlessly across borders is key to the operation of their business.

This brings with it challenges, which are again compounded by difficult geopolitical and economic circumstances. In recent weeks for example, we’ve seen significant flux on FX markets which can have real consequences for businesses or institutional investors who are buying and selling assets in multiple currencies and jurisdictions. The ability to move quickly then, and transact in a currency of choice, is vital. Advanced digital banking platforms can help – offering automated money market fund sweeps in multiple core currencies to help their clients optimise their investment returns and effectively manage liquidity.

Control admin uncertainty

In times of uncertainty, digital banking can provide additional comfort via customisable multi-level payment approvals to enhance control of what is being paid out of business accounts, with custom limits available for different users or members of a team. Transparency and accountability are also essential, with corporate clients requiring fully integrated digital reporting and statements and instant visibility with transaction cost and  balances updated in real-time.

Outlook

For some, the perception remains that digital banking is the upstart industry trying to offer the services that the traditional banking industry has built itself upon. Increasingly however, the reality is that the pressure is on traditional banks to try and stake a claim to some of the territory being taken by digital first financial services.

With a whole range of features built in which make them well suited to business in a digital world, digital banking is on a growth trajectory. Until now, much of the focus has been upon the roll-out of services to retail consumers, but with features such as automated compliance, effortless international transactions and powerful AI coming as standard for many digital banks, the digital offering to the corporate world looks increasingly attractive.

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