Regulation is a trending topic at the moment. With the financial industry changing constantly, particularly in the wake of the Covid-19 pandemic, regulation has had to keep up.
Pedro Porfirio is Global Head of Treasury & Capital Markets at Finastra, who are building an open platform that accelerates collaboration and innovation in financial service.
Here he shares his thoughts on Regulation-as-a-Service and the acceleration to digital.
In the last 12 months, business environments have completely changed and former standards and beliefs have become obsolete. A year ago, many still considered on-premise software to be safer than the cloud. This thinking has been washed away as we all work from home. Going forward, savvy financial institutions will open the way they work to inspire new business models that support increased agility – not only in the way they service clients and manage employees but also with regard to regulation and compliance.
Financial institutions were quick to adapt and move away from the limiting businesses models of the twentieth century. But the rise of digitalisation, cloud and platformification is triggering a profound change in the process of buying, implementing and running software. Consuming functionality ‘as a service’ means that software, hardware and operations are no longer relevant. What‘s important is achieving results.
A ‘Regulation as a Service’ approach will become the new normal, to the relief of banks and financial institutions as they will no longer need to deal with managing software implementation. Financial institutions will share all relevant data securely through the cloud with selected ecosystem partners, for processing in full compliance with regulations across all relevant jurisdictions.
Unleashing a new wave of innovation and growth
Regulation as a Service needs to be easy for financial institutions to consume quickly and efficiently. Until now, traditional point-to-point connectivity between applications, either on cloud or on-premise, has involved bespoke integration. To unleash the full potential that the cloud and “as a service” offerings can deliver, clients and service providers need to connect in a different way that offers agility and scalability.
Ecosystem environments, for example like Finastra’s open innovation platform FusionFabric.cloud, are built to provide financial institutions choice, allowing for easy adoption supported by open APIs. These APIs as well as development sandboxes are open to all, from financial institutions to fintechs and large technology companies.
This approach brings agility and flexibility. As a financial institution outgrows a product or service, they are free to unplug it and start with a new offering designed to better fit their needs. The bank is no longer tied to a software vendor. They can use the platform to consume services and innovation no matter where it comes from. This positions financial institutions to be future-ready, supporting continuous evolution with minimum effort and expense.
And because it is so much easier and faster to engage and onboard ‘Regtech’ service providers through an open platform ecosystem model, financial institutions can opt to work with specialist suppliers to manage regulations across different jurisdictions, for example to manage local reporting requirements in specific geographies, or to gain a global view. Know your customer (KYC), anti-money laundering (AML) and sanction-screening requirements are all examples of services that can be provided in this way, as well as ‘risk as a service’ type offerings for handling the necessary risk calculations in relation to the Fundamental Review of the Trading Book (FRTB).
Enhanced data management lies at the heart of solutions like these. The use of artificial intelligence and machine learning, supported by cloud and digitalisation, will connect to this readily available data, and will be key in ensuring compliance, helping to spot suspicious behaviour, potential fraud or other areas of risk. It will allow financial institutions to process data to an extent never possible before – and will become a ‘must have’, running on top of the extensive data that financial institutions will be able to consume through a platform ecosystem.
Currently, many banking and treasury management systems, and the regulatory reporting solutions that sit alongside them, are working as independent data silos, making it difficult to consolidate data. APIs and data lakes, on the other hand, provide a single access point to multiple sources of data, providing visibility front-to-back to reduce risk and ensure compliance, through real-time reporting.
Bringing speed to regulatory compliance
Adhering to existing and emerging regulatory agendas stretches banking resources thin. In the face of growing regulation, ecosystem partnerships will open up new opportunities for financial institutions to engage with Regtechs and achieve compliance as efficiently and effectively as possible. This can provide a real leap forward in compliance for banks.
Regtechs that have historically been challenged by lengthy onboarding and implementation processes at financial institutions have a huge amount to benefit from engaging in an open ecosystem environment. In the past, regulations may have changed several times even before implementation is complete. A platform approach means there’s no need for Regtechs to go through a complex set-up process with each individual bank. Instead, banks can select and start consuming offerings from Regtech providers immediately. It can even enable them to ‘try before they buy’ ensuring the service meets all their compliance needs before they sign up.
So what’s next? Regtechs that step up to offer ‘Regulation as a Service’ offerings will enable financial institutions to benefit from these new business models. The mantra should be: “When there is an App, there is a way.” Adopting a platform-based approach will probably be the most important action separating winners and losers in financial services and is key to being agile and compliant in complex regulatory environments.