Why Are Financial Institutions Hesitating in Implementing Technology in Compliance?
Compliance in finance has always been a difficult topic—The banking and finance sector has been powered by manual work over decades now.
However, with businesses adopting digital technology for their working processes more than ever before, there has been a significant shift across almost every industries. This has resulted in the change in the approach of the financial sector as well, seeking to keep pace.
Many of them have introduced various innovative applications and solutions to enhance the banking experience by making it more seamless and effective, but this is mostly on the customer-facing end.
Meanwhile, in the backend, many processes are still outdated, which often proves to be a hassle for the employees.
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Reasons for Not Investing in Technology
For businesses that still operate using more traditional methods, typically involving manual processes for things like data entry, it’s significantly more difficult for them to the benefits of new IT services and technologies—and financial companies are no exception.
Most financial institutions are reluctant to do so as changing their whole infrastructure is not only costly, but also needs a lot of time and extensive planning for implementation and ongoing support.
Financial institutions rely heavily on customer trust and support and many organizations feel that sweeping changes to infrastructure is simply too big of a change, given the implications of a poor digital transformation project.
Just 23% of financial institutions view themselves as having digital capabilities that are better than their competitors, compared to 35% of businesses as a whole.
The hesitancy of finance firms to adopt digital transformation has led to increased interest in implementation now to catch up, but the reality of implementation is still an issue. While 54% have actively developed a strategy for digital transformation, only 14% of them are actually implementing it.
Most employees are novices in the field of technology, a common aspect of technology adoption that has to be addressed by all businesses. Hiring experts, training existing employees, and the disruption of removing legacy software is a time-consuming and expensive process.
Moreover, due to an already existing system or manual process for compliance in finance, along with employee familiarity with current processes, these expenditures seem unnecessary to many.
Most organizations do not want to take any chances with their compliance management process as that puts the company’s risk management technique in jeopardy.
Keeping up with the norms of social distancing, banks and financial institutions have been forced to accelerate their digital plans.
Organizations who have remained reluctant to move towards digital platforms have had to face several consequences.
This is particularly the case with cybersecurity. For example, consider the uncomfortable reality that two-thirds of financial services firms have suffered a cyberattack over the course of 2020, with just under half reporting a rise in attacks since the start of the pandemic.
Cyberattacks can be (and often are) devastating to all businesses, let alone those in the finance industry who possess enormous amounts of very sensitive data. The protection of this information, for the purposes of compliance and security, has been put further into the spotlight for many finance firms in light of the pandemic and prompted many to adopt new solutions to protect themselves.
Despite lagging behind in compliance technology and digital transformation in general, more than a fifth (21%) of financial firms cite developing a digital transformation strategy as their top business priority.
Despite all these concerns, financial institutions have often not found themselves ready to support the technological infrastructure required to ensure their operations are fully digital to the extent they need to be.
Of course, the main reason for not investing in the digital initiatives required for the security features and compliance they need is simply because, for many, the perceived gains are not worth the investment—often without fully considering the adverse effects a cyberattack can cause.
For 77% of the MSP respondents in a Kaseya survey, 10 to 20% of their clients have experienced at least one cyberattack within the 12 months prior to the survey. This reflects the state of affairs before the pandemic took hold, which has itself led to a vast increase in security incidents over the last year.
How Does Technology Make Compliance Easier?
To reduce the negative impact of manual compliance management; automated workflows for compliance in finance is often introduced into the system as a way to improve efficiency and reliability.
With the sharp rise in financial technology, a niche segment specifically targeting the regulatory problems emerged.
Soon, the share of this market expanded with increasing rates of fraud and more sophisticated (and complex) regulations. The RegTech market has become a hotbed for emerging compliance technology.
The regulation technology industry (RegTech) was worth $5 billion in 2019. By 2026, this figure is expected to reach a staggering $33 billion, one of the fastest-growing tech sectors in the world.
RegTech is a technology developed to assist the companies to streamline sophisticated compliance mandates and regulation-based activities. It results in a reliable, efficient, and faster compliance process.
Like RegTech, the FinTech market is increasing in terms of investment by billions every year. It uses innovative tech to disrupt the decades-old financial system, so much so that 88% of current institutions believe they will lose some of their business to FinTech firms.
Differences in management and culture are the biggest barriers for integrating FinTech business startups into traditional companies, 55% of FinTech representatives say.
Finance, banking, customer service, healthcare etc. are a few industries who have been positively affected due to the emergence of FinTech firms.
Moving Forward with New Technology
Using technology in compliance empowers people and reduces inaccuracies caused by manual processes. The overall workflow for processes is accelerated and produces higher quality output. Apart from increasing productivity, it also promotes transparency as every transaction and workflow can be monitored and has an audit trail.
By using modern machine learning algorithms, clear links can be drawn from requirements to policies, mapping the level of implementation and providing better training to compliance staff. The immutability function of blockchain technology is used for the third party due diligence and transaction monitoring.
Robotic process automation (RPA) is used to automate repetitive jobs and make them faster and more efficient. Big data and cloud computing is used for all the storage of data that is produced by any company.
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Using cloud services is not just reliable, but also makes it faster to access information and easier to scale security protocols.
Furthermore, these data can be analyzed to produce patterns in regulatory check and compliance fails which in turn will help to predict when and where regulatory mishaps could occur in a workflow. This helps the organization prepare their risk management strategy.
With increasing cyberattacks, financial firms are taking action by improving risk management protocols and intrusion detection systems through machine learning tech.
The introduction of online verification has brought a focus on the protection of online customer data. There is a lot of data produced in transit, at any point of time, from sources such as online transactions which need to be secured with the help of tech like this.
With the finance industry slowly moving towards digitization; it is becoming increasingly necessary to come up with better data security solutions and policies
Technology, especially in the form of artificial intelligence, is helping in this cause. Machine learning is being used to monitor compliance of online transactions. Lastly, regardless of all the risks that come with using technology in compliance and the costs of investment, organizations are showing an inclination to bring their tech adoption up to date to ensure necessary compliance in finance—but they must adopt now, and not later.
This guest post was brought to you by Shub Nandi, Co-founder & CEO Of PiChain. He has more than a decade of experience in building and selling software for finance and regulatory compliance management. At PiChain, Shub provides organizational leadership with his unique combination of business understanding and technical acumen.