In the current climate of escalating costs within the banking industry, financial institutions often view compliance as a bureaucratic burden. But can it be more than just a box-ticking exercise? Xiou Ann Lim speaks to Richard Chapman, head of strategy for the reconciliation business at FIS

Regulations have been tightened in the aftermath of the financial crisis and banks have been subjected to greater scrutiny from watchdogs. Apart from having to deal with a host of other challenges, banks have been scrambling to keep up with complex regulations. While there is no doubt that these regulations have been put in place to protect all relevant stakeholders, the question is whether the resulting cost of complying with these regulations are putting Asian banks at a disadvantage in a time of growth.

Apart from having to contend with disruptive start-ups and rising client expectations, banks are also facing enormous pressure to keep compliance costs low. Not only is compliance expensive, it also takes up considerable resources. The required data for reporting must usually be collected, aggregated and analysed before it is deemed ready for publication – and because this is done on the regulator’s behalf, the undertaking does little to move the business forward. But most importantly, banks are of the opinion that this costly and tedious exercise does not translate into revenue. As a result, they approach regulations reactively and often fail to realise the strategic advantages that can be gained from it.

Head of strategy for the reconciliation business at FIS, Richard Chapman, suggests that banks stop thinking about compliance as a cost centre. Pointing out that there are indeed a lot of regulations that banks are expected to adhere to, he says banks tend to approach meeting regulations in a couple of ways – either tackling the bare minimum requirements to simply come up with an approach that will tick the boxes or seek a strategic solution that will convert regulatory compliance into a competitive advantage and value for the bank.

Using BCBS 248 as an example, Chapman says: “Regulation dictates that banks need to report on their intraday cash position once a month. A simple approach to meet this requirement would be to take a dump of data, pull out relevant statistics and report them to the regulator.” But this suggests that it will be all cost with little value – merely achieving what is required from a compliance standpoint.
However, he says that if banks have an automated solution in place, they can collect cashflows and balances, validate their accuracy, calculate and report intraday positions and provide access to stakeholders such as treasurers and cash managers. This creates a window of opportunity to track and respond to unexpected activity or identify potential funding opportunities. “If there is a surplus in funds, they can utilise this to generate returns. If there is an unexpected shortage, they can plug that or interact with the payment queues to protect the bank,” he explains.

This streamlines cash management, while creating operational efficiency and reducing operational cost. “Such an approach also enables banks to respond to the underlying ethos behind the regulation, which is to encourage banks to understand their intraday positions to prevent the introduction of liquidity risk,” Chapman adds. He goes on to say that monthly reporting does not necessarily translate into full understanding of what regulators are trying to prevent – systemic failure. One could therefore deduce that these guidelines will in time evolve to support a more tangible demonstration of visibility into intraday liquidity.

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Essentially, Chapman is of the opinion that if banks take a more strategic view of what regulators require of them, they obtain value from carrying out compliance undertakings and protect themselves when more regulations are introduced.

Chapman also believes that Asia’s position as a greenfield site plays to its advantage – as compared to many of the more established global banks that are burdened with a legacy of technology, processes and infrastructure inherited through acquisition and expansion. As a result, Asian banks are not burdened with the dilemma of whether to rip out existing systems and replace them. “Most of the time, particularly in reconciliation, systems in Asia are manual in nature. So, it is not a question of rebuilding – but introducing automation,” he says.

This comes at a critical juncture in which Chapman believes that “the volume of transactions is going through the roof”. He believes that a centre of excellence for reconciliation – instead of doing it within business lines and branches – will help further reduce operational costs risk. “Doing it all on one platform will introduce massive economies of scale,” he adds.

“Banks all want to do the same thing. They want to validate information in real-time instead of at the end of the month, so why not do it collectively instead of building the infrastructure internally? Allowing third parties to provide non-core services to banks will assure them of data quality and help them achieve an economy of scale that is unattainable on their own” Chapman suggests. These services span operational support under ATM channels, e-channels, mobile payments, credit card payments, branches as well as an underlying validation and reconciliation capability that supports straight-through processing and efficiencies across all different components of a bank.

Chapman reveals that when banks were asked in a survey about their appetite for putting their reconciliation process into a managed service three years ago, 5 percent said they would consider it. “We asked banks the same question six months ago and 75 percent of those surveyed said that they would consider it,” he discloses. This indicates a move and change in attitude towards managed service. “It has taken a long time for financial institutions to get comfortable with it, but now they are,” he observes.

Investments in such solutions may also help banks better understand their business, customers and risks – all of which can be used to drive changes in how and where the institution operates in the coming years. The benefits that they stand to gain from these investments may also be above and beyond the original intent. Despite being driven for the most part as a response to regulatory stress, investments in technology and services could results in more rigorous collection of data and analytics capabilities. Much more than compliance to existing regulations, banks are actually gaining vital new business acumen in order to chart the course for the near future.