How Innovation And Tech Drive Post-Crisis Growth, Compliantly

CEO and Founder of PerformLine, RegTech empowering organizations to proactively mitigate regulatory risk in consumer interaction channels.

In recent months, the pandemic has posed a unique set of challenges for members of the financial services industry: They must protect consumers and help those facing financial hardships, all while managing remote workforces and trying to keep up with new and changing regulations.

According to a recent McKinsey report that surveyed more than 200 executives, over three-quarters said that the fallout from the crisis will create significant new opportunities for growth in their industry, and the report shows that historically “companies that invest in innovation through a crisis outperform peers during the recovery.”

While the pandemic has undoubtedly contributed to the acceleration of technology adoption by consumers and organizations alike, several other key trends in compliance are playing a large part in its rapid growth and acceptance — some that began before the pandemic, and some that will likely outlast it.

Regulators Supporting (And Encouraging) Innovation

Today’s regulatory environment is one that supports and encourages innovation within the financial services marketplace. The CFPB’s multiple innovation efforts (including new sandbox policies, trial disclosure programs, no-action letters, the creation of the American Consumer Financial Innovation Network and the involvement in the Global Financial Innovation Network), FINRA’s recently created Office of Financial Innovation and the FDIC’s proposed program to help facilitate partnerships between financial institutions and tech firms are just a few recent examples that demonstrate the regulators’ support.

Regulators want to create an environment where financial organizations don’t need to be afraid to push the envelope and test new ideas on how to effectively and efficiently execute a compliance program. With this, many organizations are taking this as an opportunity to adopt new technologies to help streamline the compliance process.

The Emergence Of Less-Traditional Business Models

To keep up with growing competition, many organizations are ditching the traditional business model for more unconventional models. Many financial companies are leveraging partnerships with fintechs and are branching out into new lines of business to help break through the noise. 

Google, for example, has partnered with eight different banks — BankMobile, BBVA USA, BMO Harris, First Independence Bank, SEFCU, Coastal Community Bank, Citigroup and Stanford Federal Credit Union — as part of its digital banking efforts. Unlike traditional partnerships, Google’s innovative approach is cobranded, where Google will control the front-end user experience and the banks will handle the accounts behind the scenes.

While these partnerships provide the opportunity for banks to grow their customer bases substantially, they won’t have much control over the customer relationships, which could pose new compliance challenges that they haven’t faced previously.

On the flip side, more and more fintech companies are applying for bank charters — including SoFi, Square and Varo Money — to become self-sufficient, operate under one set of federal regulations (instead of individual state regulations) and keep up with the competition.

For these organizations that are breaking out of the traditional business models, there is a fundamental need for risk and compliance to change with them. Technology is going to help these newly digital organizations navigate and optimize their compliance and overall business objectives. 

New Banking Models Working Under State Law

Many of the emerging banks and financial service models are operating heavily under state laws, as opposed to traditional models that worked mainly under federal law. For these organizations, there is an increased focus around state-level licensing, regulations and interpretations. This focus is making change management a more complex scope of work to manage, leading many organizations to turn to technology for help. 

Exponential Growth Of Competition In Banking

The number of players and competitors, and the complexity of how organizations are partnering and engaging together, has grown exponentially. Companies like SoFi, Revolut, and N26, for example, are stepping into the challenger space, taking innovative ideas and capabilities and creating a direct competitive model to traditional banks.

As the financial services ecosystem continues on the path of rapid change and increasing complexity, traditional institutions are feeling the pressure to invest in technology and innovation to keep up with their digital competitors.

The Emergence Of U.K. Laws And Regs

European laws enable international-based banks to operate across borders and export their products and services into the U.S. — effectively competing with the U.S. financial services industry. As more European-based organizations are breaking into the domestic market, it’s putting pressure on U.S. organizations to pivot, adapt and compete through technology and innovation.

Prioritizing Innovation

The subtitle of the aforementioned McKinsey report says it all: “Prioritizing innovation today is the key to unlocking post-crisis growth.” Thus, forward-thinking compliance leaders who are turning to innovative technology and automation to manage the turbulent regulatory environment and protect their organizations and their consumers from risk will have the competitive advantage after the crisis.

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