How compliance technology empowers business growth

The pursuit of technological innovation and efficiency in banking is relentless.

As a result, organizational components, such as application frameworks, necessarily become more complex. This is at odds with the primary goal for banks — simplification through the integration of systems, streamlining of data and establishment of more efficient ways of working. The growing backlog of regulatory reporting is a particular concern.

This blog reviews the strategies banks adopt to balance business growth, compliance requirements and evolving operational challenges.

Weathering legacy platform and regulatory storms

Market trends: Increasing compliance costs

Figures from a 2022 analysis of the UK market emphasize the significant financial burden on banks. On average, companies spend a staggering £200 million on compliance technology, with varying costs for small banks (£83 million) and retail banks (£264 million). UK financial services experienced a 19% increase in spending over 2021, reaching £34.2 billion a year. 

Moreover, 32% of banks anticipated that compliance costs would exceed 5% of their revenue. And projections predicted an 8% blanket increase over the following 3 years. These trends underscored the pressing need for banks to effectively navigate compliance challenges.

Four tactics to help you align technology with business

1.     View modernization through a business lens

Like any other enterprise, banks base business decisions on cost, revenue, compliance and profitability. Focusing on these fundamental elements is crucial when seeking digital project buy-in from senior management.

2.     Optimize your workforce

Workforce statistics from a pre-AI McKinsey study revealed a stark reality. Between 25% and 40% of team workloads were concerned with writing code, leaving 60%-75% for coordination and daily operations. Of course, AI tools are beginning to skew these coding proportions, freeing up time to be reallocated to other tasks.

Another revelation was that banks lacked senior expertise — 90% of employees were classified as junior or mid-level. McKinsey came down on the side of reskilling rather than firing and hiring (its study showed that reskilling is 20% more effective).

Empowering automation and autonomy is essential for optimizing workforce productivity. When we compared traditional KYC methods to perpetual KYC (PKYC), PKYC reduced the time spent on the discipline by 90% and costs by 85%. This remarkable statistic illustrates the massive savings that can be achieved by automating compliance processes.

However, while many financial services institutions agreed they were ready for PKYC, 65% reported that they didn’t have the necessary solutions in place to implement the change.

3.     Consider the business impact of technology

Technology (e.g., outsourcing, AI, DevOps and cloud) is not simply a cost-reduction tool. It’s also a business driver. Each new technology is evaluated based on its potential to increase revenue and reduce time to market.

For instance, outsourcing spins out beyond cost reduction. It enables banks to expedite time to market — offshore locations can hire hundreds of people rapidly. Speeding up delivery and launching new products early gives banks a competitive advantage and deeper market share.

Another example is the cloud, which is again a business facilitator rather than just a cost-cutter. It provides on-demand resources, enables flexible calculations and ensures business continuity. Cloud allows broader commercial evolution, changing infrastructure from a constraint into a business enabler.

4.     Implement a strategic roadmap

Transformation begins with team modernization. Establishing C-level-sponsored DevOps processes forms the foundation. It permeates teams, promoting incentives, role clarity and the effective monitoring of velocity and work quality.

Dividing programs into workable phases (aligned with revised funding strategies) triggers an earlier ROI. Also, by shifting savings from one phase to the next, banks can achieve business value at the exact cost, creating a sustainable and cost-effective transformation journey.

Adopting a target operating model (TOM) provides practical guidance. The TOM encourages banks to visualize a model where every project aligns with its ultimate business and IT objectives.

Without a TOM, a bank will most likely approach regulatory reporting as a standalone task, focusing solely on data collection and report creation. Whereas, a TOM guides the development of regulatory reports in line with a broader vision for data flow and consolidation. That way, each reporting project contributes to long-term objectives, promoting efficiency and strategic alignment throughout the organization.

Adopting a TOM helps turn the burden of regulatory compliance into a business catalyst, encouraging firms to change from defensive to offensive strategies.

Different attitudes, different outcomes

I’d like to share a short account of two banks with far-reaching ambitions.

ABC Bank — costly but inevitable digital overhead

ABC Bank launched a modernization program designed to reduce costs and implement a consolidated system. This approach reflected the traditional big-bang mindset, with teams concentrating on day-to-day operations and regarding technology spending as a costly overhead.

Despite significant human and economic investment, the bank struggled to meet ambitious targets. As layered processes became more complicated, the bank endured delivery delays, and the expected business value failed to materialize. Even after making extensive further investments, ABC continues to wrestle with technological issues, unable to achieve its desired outcomes.

XYZ Bank — tech investment helps drive business

In that same year, XYZ Bank adopted a different approach to modernization, focusing on agility and incremental value. The bank reorganized teams into DevOps structures, seamlessly aligning business and technology. Initially hampered by a series of obstacles, this senior-management-sponsored approach proved successful. By implementing unified backlogs across all systems and dynamically monitoring backlog prioritization, the bank delivered incremental business value every 2 weeks.

Today, XYZ Bank is a testament to the success of this strategy, maintaining regulatory compliance while achieving lasting business value and technological progress.

In closing

More than any other sector, the financial services industry (FSI) is feeling extreme pressure from spiraling compliance requirements. In a recent survey, Dun & Bradstreet reported that demands on FSI compliance teams increased 35% over the previous year.

Although expenditure has flatlined, banks are taking tentative steps to address the situation by increasing headcount while adopting new technologies like automation and AI, and implementing advanced processes (e.g., perpetual KYC).

However, despite acknowledging the apparent advantages of using AI, 69% of the study group were unsure about wholly aligning the technology with their compliance practices, due to concerns about the ethical and regulatory ramifications.