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January 25, 2022

Data modernization: banks’ opportunity to leverage regulation for innovation

Here’s how regulation could be the answer to driving innovation for financial services organizations.

There’s nothing new about regulatory change in the banking and financial services (BFS) arena. What is new is the seismic shift in the data granularity required, as well as the frequency and method of submitting regulatory mandates.

With a host of new regulations and guidelines coming down the track, as well as digitization and cloud adoption programs gaining ground within BFS organizations, now is the time for these businesses to take a fresh look at how they manage and leverage their data.

Because data modernization isn’t just about investing in systems to keep a banking license – it’s also about reducing costs and identifying opportunities to drive innovation and create better products and services for customers.

New data models for compliance

A good example of the need for data modernization in compliance comes from the Basel Committee on Banking Supervision’s introduction five years ago of its 14 guiding principles to improve visibility of risk exposure. New regulations, including Basel IV, further highlight the continuous and increasing need for organizations to change the way they record and report risk data.

Rather than relying on static reports relating to a specific point in time, regulators want to see banks shift toward a more product-centric view and a more harmonized reporting framework that will support automated, real-time sharing of risk and compliance data through secure data interfaces.

The ESCB Integrated Reporting Framework (IReF) is a great illustration of this move toward harmonization, as it introduces a mandatory framework that allows banks to simplify six current mandatory reports into a single, integrated data submission.  

To help banks achieve this, the ESCB has introduced the Integrated Reporting Directory (BIRD), a data dictionary that simplifies the process of collating, modeling and processing regulatory reporting data requirements. By adopting BIRD, banks can also ensure easier adoption of future compliance reporting, since upcoming regulations after 2024 will likely be based around this model

Legacy limitations

However, BFS organizations have often lagged behind other industries in data modernization. In part, this is due to risk and finance functions historically relying heavily on people and manual processes to address compliance, as well as tried-and-tested technology infrastructures and an overarching culture of, if it ain’t broke, don’t fix it.

The worry for many CEOs is that an over-reliance on human resources and legacy technology platforms means that when it breaks, it breaks big, and the repercussions are massive.

Case in point are the huge fines and penalties awarded to banks in Europe over the past couple of years when banks’ systems have failed to react, take action and then report on major risk and compliance events in time. Across the Nordics and Benelux alone, money laundering incidents saw a collective destruction of over $20 billion in the market capitalizations of two major banks.

Moreover, the over-reliance on legacy platforms and manual processes equates to huge ongoing cost and operational inefficiencies that, in turn, can make modernizing more difficult, time-consuming and costly.

A real-world look at data modernization

We’re currently working with risk and finance departments of major financial services organizations across Europe that had historically addressed accelerating regulatory mandates by increasing investment (linear in many cases) solely in people power — which had led to growing risk and compliance headcount to thousands of people.

We’re helping these clients modernize and digitize their technology landscapes and shift the ratio of their investment from 80:20 (headcount vs. technology) toward a much more balanced and efficient 50:50 ratio that delivers more value and return on investment.

What we mean by data modernization in risk and compliance is the design and delivery of system architectures and operating models that streamline the end-to-end process of capturing, processing and sharing data that drives efficiency and enables innovation.

A modern data architecture should be able to process any required business or technical rules information that can then be stored, analyzed and shared in various forms for compliance reporting.

A successful data modernization journey incorporates a set of modern data architecture components, namely:

  • Data fabric. The system must be able to pull in any data from any application and source, regardless of residency.

  • DataOps. This is the orchestration of building and managing data assets that are interoperable, flexible and scalable.

  • Data responsibility. Tools and processes are needed to ensure the long-term viability and governance of data assets.

  • Enterprise AI. AI needs to be embedded and scaled into business processes to automate and empower decisioning.

  • BizOps. Through change management, people are empowered to move the organization toward the target data management operating model

Most organizations already collate data from disparate systems to compile static reports that are submitted frequently for regulatory requirements. Those organizations that are already on the road to modernizing their data platforms may have started looking at integrating data feeds into a single platform, with live, online compliance testing.

In our view, the end goal of data modernization is to accelerate the move to a fully dynamic environment in which data can be shared between financial organizations and regulators in near real-time, using APIs that can filter data depending on the regulatory requirements at different points in time, for different products and services. 

To compliance, and beyond

This vision offers compelling benefits to BFS organizations. First, governed and automated data sharing makes the process of demonstrating compliance more transparent, simple and cost-effective. If BFS organizations can adopt these principles now, then as new regulations come into operation, they’ll be in a better position to demonstrate compliance more quickly and with less additional investment required.

But smarter organizations are using their investments in data modernization a step further to drive innovation and value across the wider organization. One great current example of this is the growing importance of ESG. As banks move from solely financial values to a much wider concept of “integrated value reporting” where data from many different sources should be incorporated to obtain a more holistic view of investment, risk, and return.

We’re already seeing financial organizations use this data to drive insights into not just compliance but also to identify potential new business strategies, products and services. By leveraging and combining their internal and data assets, banks are creating new products and services ranging from flexible microlending products, to sustainable/green investment portfolios, through to smart budgeting and financial advisory applications for customers.

Cloud adoption is now part of the mandate for most organizations in the BFS sector, as cloud platforms allow them to more easily capture and analyze larger and more diverse data sets than ever before.

Data will drive the BFS future

Within a modern data environment, it isn’t just possible to share data with regulators for compliance and risk management purposes. BFS organizations can use modern data environments to share data with partners, creating increased collaboration and efficiency.

As banks expand their operating models, which increasingly rely on broader ecosystems beyond their organization (i.e., in the form of formal joint ventures or creating new products and services that bundle partner firm capabilities), the platforms required will need to adopt data modernization capabilities for optimal collaboration, open banking, governance and innovation.

Ultimately, regulation can’t be avoided in the BFS sector. But keeping one step ahead of the changes with data modernization can help financial institutions drive business value that goes far beyond compliance.

Cognizant Insights Team

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