Steve Moe, CTO and Head of Technology, Lending at Finastra

Once considered a cost center for financial institutions, regulatory compliance functions now hold the potential to generate significant value. They achieve this by reducing costs and generating meticulously accurate data, empowering leaders at financial institutions to make strategic decisions with confidence.

Looking ahead, four key areas of regulation will impact banks and businesses in the lending arena in 2024 and beyond. Addressing these areas will help banks enhance the quality and efficiency of their processes and meet customer demands for faster, smoother, and more personalized lending experiences.

Gearing up for Basel IV

Basel IV requires banks to rethink their business models their revenue sources or even exit some markets and activities. Depending on the type of bank, its size, location and risk profile, some may gain a competitive advantage, while others may face increased pressure. Technology can ease the regulatory burden and enable the discovery of new paths to increase profitability. year implementation began on 1 January 2023, and this year, banks will begin work in gathering and testing data.

Making ESG a key priority

In the near future, the industry will face increased regulatory oversight regarding sustainable finance. Within the Basel IV reporting standards, banks must report taxonomy-aligned economic activities for two environmental objectives, with plans to expand to four. Finastra’s ESG Service enables the integration of ESG performance criteria into risk and pricing, supporting financial institutions as they track ESG data, analyse it swiftly, and commit to achieving their targets.

While global standards have yet to be published, markets will see greater regulatory scrutiny in the months to come. ESG is part of the puzzle for scope. For reporting standards, from January 2024, banks will need to report taxonomically aligned economic activities to environmental objectives, with the expectation that this will grow to four other environmental objectives.

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Getting ready for ISO 20022

ISO 20022 is a global language for financial communication. To get ready for it, you need to assess your current systems and processes, map out your migration plan, engage with your stakeholders and providers, and monitor the progress and impact. ISO 20022 is a strategic opportunity to boost your efficiency, compliance, and customer satisfaction.  ISO 20022 offers many benefits, including more data, flexibility, and interoperability. You can send and receive more information with each payment message, tailor your messages to suit different needs and scenarios and communicate seamlessly with other payment systems and platforms. ISO 20022 is a new way of doing business that enhances your performance, innovation, and collaboration.

               Preparing for the regulation of Gen AI  

Gen AI is on the tip of everyone’s tongue in terms of opportunity but it will also potentially be subject to regulation in the future. It to drive competitive advantage potentially, but it also poses challenges and risks. Gen AI can introduce bias, errors, or ethical issues in credit decisions, appraisal, target advertising, and employment software. The technology is,, under the regulatory ‘microscope’ to ensure it’s used responsibly and transparently. There’s more clarity emerging as we saw the EU Parliament voted in favour of the AI Act, and in the US, there is a non-binding blueprint for an AI Bill of Rights.

While Gen AI (and AI more broadly) may be the focus of future regulation, it’s also worth noting its ability to process and analyze data at unprecedented speeds. In the future, we can expect Gen AI to play a significant role in automating routine tasks. Whileenhancing the efficiency of regulatory compliance efforts.

Indeed, collecting, processinganalysing, and analysing data for ESG criteria classifications as well as for Know Your Customer and Anti-Money Laundering purposes were among the top use cases for Gen AI, as identified by respondents to our recent State of the Nation survey. The agreement was also widespread around Gen AI’s ability to automate manual or repetitive tasks and for improving risk management, decision making and predictive analytics. When used in the right way, Gen AI will further augment human oversight and increase the value-added regulatory compliance function both for financial institutions and for the benefit of the broader economy.

Take action now to address the four key areas of regulation that will impact banks and businesses in the lending arena in 2024 and beyond. By gearing up for Basel IV, making ESG a key priority, adopting ISO 20022 messages, and preparing for the regulation of Gen AI, banks and businesses can enhance the quality and efficiency of their processes and meet customer demands for faster, smoother, and more personalised lending experiences