How regulations are bringing banks and fintechs together
Regulation in banking and finance, and the pressure and challenges it places on many traditional financial institutions were high on the agenda during London Fintech Week and should feature just as much during Sibos in September.
The Second Markets in Financial Instruments Directive (MiFID II), the Securities Financing Transaction Regulation (SFTR) and the Fundamental Review of the Trading Book (FRTB), helps drive fintech growth as banks look to partner with specialist providers who can provide cost-effective ways to help firms remain compliant and make the most of their data in the process.
These reporting requirements place intense demands on banks in terms of the level granularity they need to provide about their data as well as on the processes by which reports, and business applications are supplied with data. Banks not only need to report more detail but also track additional contextual information around data including its sources, its quality checks and the lineage, i.e. the data’s origins, what happened to it and where it moves to over time.
Given the complex application landscape of many firms, this is challenging to do using only in-house resources. Fintech firms bring technological innovation to the party and have a key role to play as firms look to make the most of their data and look to lower the cost of change. Fintechs have evolved their approach based on cross-industry learning and combine expert knowledge with technological innovation. They can provide a cost-efficient way for banks to deal with regulation and manage the many changes they need to make.
Banks automated early and have a history of siloed decision-making and budgeting by business line when it comes to technology infrastructure. This has led to a bewildering technology landscape at times, consisting of vast amounts of business applications, which in turn has made regulatory compliance and risk management more complex. Risk management is, after all, concerned with gaining an aggregate number that applies to the whole firm. It needs to have an enterprise perspective and that requires data integration which most banks are not specifically set up to deliver today.
This history of local department level automation complicates the job of managing regulatory change which is by its very nature typically at an enterprise level. It is yet another reason why the overall regulatory problem is so large for banks and why there is an urgent need to draw on the help of specialist fintech partners.
Key services that fintechs deliver to banks to streamline the process of regulatory compliance include: packaged integration; delivering a trusted quality management process; access to quality-proofed consistent pricing and reference data and easy on-boarding of data feeds.
The last-named is especially challenging today given the increasing data-intensity of regulatory reporting and decision making. New content offerings speak to data-hungry business users but need to be integrated into reporting workflows. Content providers often add new detail and evolve the delivery format. Many of the traditional content providers have moved from an end-of-day, batch file-based delivery background to more interactive and intraday sourcing using modern application programming interfaces (APIs).
That presents both opportunities and challenges to banks. Rather than waiting for a file to arrive from data vendors, firms simply call the API in real time to get the information they need. However, the challenge is that to truly gain advantage from these sourcing options, they additionally need the data management and integration that supports them, out-of-the-box with no manual intervention. They must also ensure they keep track of these requests and prevent unnecessary duplicate sourcing, which creates additional noise by generating multiple copies of the same data.
In line with this, the intensity of new regulation is far from the only problem facing banks today. There are also dealing with a range of other operational challenges including the need for improved efficiency, cost reductions and rationalisation of their technology stacks and the shift to cloud, which are also driving them to seek out the services of fintechs.
This requirement is often fuelled by a push to stay ahead of the competition in delivering services to their own banking customers, together with changes in the rules of engagement as business processes become more virtualised. Whatever the precise driver, the upshot is that fintech services are in greater demand.
Even going beyond Fintech Week in the run up to Sibos, it may be a good time to consider that rather than just drawing on fintechs to help them with their in-house work, banks might also consider going one step further and opting for a managed services approach.
For banks, there are a raft of benefits. Firstly, it enables them to shift a portion of the delivery risk to the supplier. They no longer have to go through the whole process of buying a service, implementing the solution, taking out a database licence or investing in cloud resources and creating a project team.
Secondly, when it comes to running the operation and changing they can pre-agree service levels and report against business-relevant KPIs. In other words, they buy the technology benefits with a service wrapper around it. Managed services also allow them to start small and expand rather than necessitating a full-scale in-house implementation from the word go.
This was an important discussion point during Fintech Week and the conversation is worthwhile expanding on at Sibos. Banks need to focus on data management and data integration more than ever to meet the latest wave of regulations and drive competitive edge. Partnering with fintechs and opting for a managed services approach enables them to do this efficiently and well, while reducing implementation and operational risk into the bargain.
by Mark Hepsworth, CEO at Asset Control