Staying ahead of the beat
In music, the beat is the constant pulse which creates the context for the performance to be understood. Classical melodies tended to sound like they were chasing the beat; tense, shrill, erratic, often sounding rushed in their attempts to keep pace.
Jazz on the other hand was cool, confident and poised, staying firmly ahead of the beat and sounding infinitely more composed as a result. The thudding beat in banking right now is the ever increasing tempo and quantity of regulation.
Human error blues For retail banks, being ahead of the beat is essential and as with all shifts, it will require a new way of thinking. Intelligently targeted automation should be the lead instrument in staying ahead of the regulation drum roll.
In January 2014, Standard Bank was fined £7.6 million by the FCA (Financial Conduct Authority) for failing to comply with anti-money laundering regulation. This was not a ‘sexy’ case of underhanded tactics; this was quite the opposite, incomplete and inaccurate implementation of a process. The FCA noted sloppiness in their operations and fined them accordingly.
Just three months later, a similar case was made public. Bank of New York Mellon was fined £126 million by the FCA for failing to fully implement custody rules and for storing monies in incorrect accounts.
According to a source close to the event, this was “an administrative error.” 0.06% of assets were held in the wrong accounts.’ To provide some context, consider that average human error on data entry is 0.5% so this error level is distinctly impressive but dismally inadequate when compared to an automated solution.
Raising the tempo
Unfortunately, many established firms are still behind the beat. A recent study found that only 45% of companies have a ‘data warehouse’. A data warehouse is a central data repository and a fundamental component of an IT infrastructure which allows for automation of reports and a reduction in human error.
Automation will of course not solve all problems, but its tactical deployment can be a powerful force if used expertly.
There are two key points to consider for banks when thinking about large scale automated solutions: Automation is a significant up-front cost, but the regulatory fines suffered by banks in recent years dwarf a potential investment in an automated solution, which could ultimately save these banks from punitive FCA action.
The hidden costs in manual compliance are significant. For instance, rather than just considering the salary of a compliance employee as a cost to the bank; in addition, they should look at the opportunity cost of these employees not being engaged in profit driven activities.
Large scale retail banks should look at three areas when undertaking a large scale automation project:
1. Ease of automation: Look at all back end processes and split into three categories: fully automated, partially automated and fully manual
2. Business value: What value does each process add to the business and how much FTE (Full time equivalent) resource does it demand
3. Regulation: What are the regulatory consequences of automation and how will the legal framework inform the IT strategy?
Using these three pillars, banks can undertake meaningful analysis of their back office processes and begin to extract significant value from targeted automation.
“Bebop was about change, about evolution. It wasn't about standing still and becoming safe. If anybody wants to keep creating they have to be about change” (Miles Davis, 1961)
In an uncertain climate with reference to both economics and regulation, flexibility and change are essential for the thriving of any business. Retail banks should take a step apart from the crowd and consider the benefits of an ambitious automated solution.
This should keep their compliance hiring stable while also freeing up existing resources to focus on value adding and profit driven activities. They may even have some time to learn a new instrument with the hours they’ve saved.