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Compliance systems: filling in the gaps

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KK Gupta, CEO at Facctum

 

Financial crime and other regulatory compliance can be a costly, time consuming and resource-heavy endeavour for businesses in any sector.  With the banking industry increasingly under a regulatory magnifying glass, it’s even more important to get it right.

Indeed, nearly half (46%) of organisations surveyed earlier in 2022 by PwC reported that they had experienced fraud, corruption or other economic crimes over the course of the last two years. Penalties for compliance failures are now higher than ever, and banks must take action to navigate the complex compliance landscape. But how?

 

Finding the gaps

The current regulatory landscape – particularly when it comes to sanctions on Russia and other nations – is fluid, and therefore harder to ensure compliance. This, coupled with the fact that many firms’ data is incomplete, inconsistent, and imprecise, means that businesses struggle to effectively adapt to increasing compliance demands.

The success of compliance activities requires the provision of easily accessible, high-quality data. However, with compliance IT capability degrading, whether it be from age, neglect or oversight, there are two clear gaps in banks’ existing compliance systems.

 

Employee understanding

The first of these gaps is a lack of employee understanding of why and how transaction monitoring systems trigger compliance alerts. In addition, those operating such monitoring systems are often found wanting in their understanding of them, leading to bad decisions entering decision models.  Furthermore, employees often lack the information that is required to conduct appropriate assessments with 76% of compliance managers saying they often track regulatory changes manually.

This is a fatal flaw in compliance systems, as if the required information is of poor quality or incomplete, systems can fail to alert high-risk transactions or other potentially criminal activity, reducing the overall effectiveness of the screening process.  Similarly, a lack of transparency of how matching technology is used to create alerts leads to operational inefficiencies.

 

Legacy systems

Data quality often depends on the connectivity of the systems hosting the data, and this is where we come to the second gap plaguing banks’ compliance processes. Older legacy systems often fail to provide banks with a connected single view of their customers, which can result in less effective outcomes.

For instance, newer ‘know your customer’ (KYC) procedures are becoming increasingly significant in customer identification, and are critical controls for the prevention of financial crime. However, legacy systems fail to connect the dots between lines of business, geographies and products. For a European bank, for example, the same customer might have a current account in the UK and a business bank account in Germany, but if systems aren’t talking to each other properly, this individual can be counted as two separate people.

These older systems also often aren’t agile enough to cope with the high intensity of monitoring, conducting data analysis. or providing connectivity required to keep pace with high impact regulatory changes and environment.

 

Switching to data-based tools

To fill these gaps and combat issues with existing systems – including efficiency, connectivity, and accuracy – organisations must consider data and cloud first screening platforms. Such platforms aim to improve risk detection and reduce workloads for banks’ in-house compliance teams, while also achieving and maintaining compliance effectiveness.

Gathering and analysing company wide data can reveal patterns and anomalies which uncover misconduct, whilst providing in-depth insight from a compliance perspective. By using a data-first approach, banks can monitor activity closely, reducing the likelihood of exposure to high-risk transactions and maintaining regulatory compliance. Furthermore, managing and reducing risk can reduce customer friction, improving their perceptions of providers and bolstering loyalty.

Such value-add monitoring is most likely to be achieved through the implementation of not only a data-first compliance approach but also via data analytics tools. For example, an enterprise-wide data model built for anti-money laundering monitoring should allow data to be segmented by products and services, to provide a company-wide view as well as providing understandable and actionable insight for business owners and regulators alike.

The use of data first tools also provides richer, higher-quality data, allowing more advanced analytics, minimising false positives, and providing clear and well-structured information to detect and report suspicious activity with far greater precision than their current system may offer.

 

Successful implementation

Adopting newer compliance technologies provides banks with more effective and efficient compliance processes – but that’s not the only benefit. These updated systems are immensely scalable and can be easily configured to fit a wide range of risk profiles and regulatory requirements – and can help banks to stay ahead of the curve.

While undertaking tech updates is a daunting task for any organisation, it’s necessary to support them through the risk landscape. Firms were previously hesitant to adopt cloud first compliance technology, but these barriers to successful implementation of such technology are now falling away. Over time, installation costs have decreased, and regulators are also increasingly encouraging banks to adopt this newer technology to make compliance easier and more effective.

With regulatory regimes around the world changing so frequently, banks are finding it increasingly difficult to maintain adequate compliance technology capacity. Regulators are requiring organisations to step up their compliance processes and onboard the latest technology. It’s not just legal compliance requirements that are changing – regulatory expectations of the standard of financial crime prevention are also evolving quickly.

 

Banking

How Banks Can Boost App Innovation, Speed and Compliance

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Steve Barrett, Senior Vice President of International Operations, Delphix 

As new finance and banking applications disrupt the market each day, and customer expectations around speed, privacy and quality continue to grow, financial organization CIOs and DevOps teams have to innovate quickly to bring new apps and updates to market, while remaining strictly compliant to a myriad of regulations. DevOps innovation in financial services requires fast access to accurate, compliant test data, and as anyone who touches the industry knows, data privacy is a highly complex, critical process woven into the everyday world of finance.

Banks and financial services organizations collect vast amounts of data, but using that data for innovation can be challenging due to the vast size and complexity of test data. These challenges can inhibit the adoption of new and transformative technologies and hinder innovation if they are not addressed head on. To address these challenges, many organizations are integrating the use of highly innovative test data management (TDM) tools within their DevOps ecosystems. DevOps TDM provides access and delivery of lightweight, compliant data for DevOps initiatives including digital transformation, software upgrades, cloud migration, artificial intelligence and machine learning (AI/ML), and analytics.

Data – the last automation frontier

Historically, application teams manufactured data for development and testing in a siloed, unstructured fashion. Over time, large IT organizations began consolidating TDM functions to take advantage of innovative tools to create test data. With the rise of modern development methodologies like DevOps and CI/CD that demand fast, iterative release cycles and end-to-end API-driven automation, legacy TDM approaches are often no longer sufficient.

Reliance on a traditionally manual, ticket-driven, request-fulfill model creates time drains during test cycles and slows the pace of application delivery. Consider the payments industry, in which agile technology companies using optimized DevOps processes can release new code hundreds of times per month. In contrast, traditional banks with slow IT ticketing systems may take months to release new features. These manual, legacy TDM approaches exist in contradiction with modern DevOps practices and CI/CD processes that depend on automation and fast feedback to development teams.

TDM for the DevOps Era

DevOps teams rely on TDM to evaluate the performance, functionality and security of applications. However, while processes including storage, compute, and code have all been automated, data has eluded the reach of most DevOps toolchains.

Now, DevOps TDM can help accelerate app releases and increase compliance.by automating the delivery, provisioning, and compliance of data. These practices provide both development and testing teams with data APIs, including the ability to refresh, rewind, bookmark, group, tag, branch, and share test data, to accelerate DevOps productivity and improve application quality. DevOps TDM also includes copying production data, and the masking (anonymization) and virtualization of data through the DevOps pipeline, which helps accelerate app releases and increase compliance.

And as the pace of application development quickens, so does the pace of privacy regulations and efficiently ensuring compliance in DevOps has become a significant challenge for enterprises. Non-production data used for testing software applications, reporting, and analytics can contain up to 80% of an enterprise’s sensitive data. To solve this, DevOps TDM provides integrated data masking to de-identify personally identifiable information (PII) and other sensitive data in non-production environments, eliminating the risk of sensitive data exposure.

The World Quality Report 2022-2023[1] by Capgemini stressed the importance of an enterprise wide approach to test data provisioning (a core component of TDM). The report states, “Over the years, with stringent regulatory and security requirements around data, organizations have increased their focus on provisioning test data safely and securely.”

The report shows that secure test data provisioning remains a challenge, with only 20% of respondents having a fully-implemented enterprise test data provisioning strategy in place to address security and compliance requirements.

Data is the catalyst to innovation

Automation is fueling myriad digital transformations within the financial services sector, but without the right data, these application innovations cannot succeed. DevOps TDM can help further accelerate DevOps initiatives by automatically delivering fresh, complete, and secure test data wherever and whenever it is needed, in minutes. With DevOps TDM, banks and financial institutions can innovate faster, reduce time-to-market for updating legacy applications, and accelerate development and testing of disruptive fintech.

 

[1] Source: https://www.capgemini.com/insights/research-library/world-quality-report-wqr-2022/

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Banking

Is traditional business banking the best option for SME finance squeezes?

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Airto Vienola, CEO, AREX Markets 

The pressures facing business and personal finances alike have been well documented.

Stories are now starting to emerge about how smaller enterprises around the UK – which make up well over 90% of the companies in the country – are coping with that mounting stress. The picture starting to emerge suggests, not well.

Personal borrowing is bridging gaps in business books

One survey released recently suggested that one in five of the country’s small businesses have taken out personal loans by the business owner to try to cover gaps in their incomes and profit margins. A further 43% said they were considering doing the same. This rush to secure additional funds by any means may be understandable for businesses feeling the pinch, but it’s neither sustainable nor savvy. Many of these enterprises are already burdened with additional debt from the Covid relief scheme, and given rising interest rates, soaring energy costs and rising cost of goods, taking on additional debt is not an attractive prospect. Add to that the fact that rates from traditional business banking providers are proving steep, smaller enterprises could be forgiven for looking to personal means to shore up the balance sheet. A recent study from members of the Federation of Small Businesses found that one in five small businesses are struggling to find business lending rates under 11%. To help these companies to survive, something clearly has to give.

Not all Alt-Fi options are equal

Alternative finance services have been proliferating in recent times, and yet almost half of small business operators have concerns about pursuing this option, despite actively seeking additional funding support. Clarity over terms and conditions is an often-cited reason for this reticence, which is only natural when undertaking proper due diligence on financial lending. This is a wise choice, especially as it has become so easy for business owners to quickly and simply access new services through embedded finance services, just a few clicks away on existing digital accounting and bookkeeping services. Many of these are still not clear about any detailed fine print, lengthy contract terms or potentially high fees, and yet these too can look like accessible and viable options to business owners facing mounting financial issues.So, it can be hard to pick the right provider without a lot of research. Those wary of the long tail of taking on debt should be particularly careful when it comes to business Buy Now Pay Later or BNPL offers, which are currently entering the UK market, though that isn’t to say that other alternative financing services won’t suit their specific needs whilst mitigating fears over risk.

A fresh perspective on an established technique

So, if debt should not be an option, and embedded finance can have downsides, where should SMEs turn if they don’t want to kick the can of cashflow problems just a few months down the road? One area to reevaluate, which has seen a tremendous shift given the fresh thinking from alternative finance is invoice financing or spot factoring. No longer the imbalanced option of last resort it was traditionally perceived to be, the option has become much fairer to the SME, in addition to providing a swifter and more flexible alternative. In years gone by, invoice financing was the purview of the banks, which led to low rates of return for businesses looking to unlock the value in their organisation, and often much better value flowing back instead to the lender taking on the risk. This is no longer the case. Likewise, invoice financing earned a bad reputation among some for tying businesses into lengthy contracts – another area which current services in the market have since addressed. Our service for example allows businesses the flexibility to access cash back on just a single invoice of their choosing – which could be the difference for struggling SMEs between dipping into loss or keeping the lights on.

One answer to the late payments problem?

Perhaps the most important area which services like invoice financing assist is overdue invoices – the bane of the British SME. Barclays claimed earlier this year that over a quarter of SMEs are finding late payments to be on the increase, and this was an already notorious issue for many business owners. Estimates show that SMEs on average have £6500 in unpaid invoices at any given time. Financing these invoices ensures that the cashflow of these strapped SMEs is healthier, gets the money back into the business without the concerns of lengthy payment terms or endless chasing, and certainly in our case, has no impact on the relationship with the other organisation. Our platform acts as a marketplace between SME and likely investors, with extensive insight provided to make sure that those investing in the invoice are matched to the right businesses. We take on the intermediate risk – removing any suggestion or potential concerns around unwanted debt collection, for additional business owner peace of mind.

While the pressures may be mounting on the SMEs around the country, one thing is clear. No business should rush into making long term financial decisions simply as the cashflow is drying up. Any savvy business would be well advised to make sure they understand the implications, short and long term, of any lending solution they look to employ. However, knowing that there are options and the business’ bottom line does not simply have to rely on traditional banking services, should provide business owners with a lot more options at their disposal to help them to face the coming months with greater cash liquidity confidence.

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