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ComplianceFinanceMay 24, 2022

APAC Digital Banks: Speed to market with sustainable success

With fully digitized banking gaining common usage digital banks are now part of APAC’s emerging financial landscape. As managing compliance risks is tricky, those seeking to enter the market and existing digital banks will need quick and secure way to compliance while staying strategic in the long run. The expectation from regulators for all banks is to adopt more systematic, streamlined approaches in risk management and regulatory compliance.

Banks relying on in-house builds must be mindful of reputational & noncompliance risks that arise from lack of expert knowledge and longer-turnaround time in development. A recent article from APRA pointed out that organizations without systems in place to manage compliance risk is exposed to devastating outcome as “Recent high-profile compliance failures show that failing to manage compliance risk can cause severe financial and reputational damage[1]” which includes paying record fines, and board chairs and CEOs being forced to resign.

A white paper from the Boston Consulting Group (BCG) published in June 2021 titled “Emerging Challengers and Incumbent Operators Battle for Asia Pacific’s Digital Banking Opportunity”[2] noted Asia’s digital banking realm saw continued interest and was home to 20% of global digital challenger banks. It named five key markets in Southeast Asia which offered fertile growth coupled with “encouraging demographics”.

Three factors are critical for digital banks to succeed; the success depends on their capability to quickly build their market share, deploy essential resources to adhere to regulations and compliance guidance, and devise long-term strategies to move the business forward.

Regulatory challenges devour key resources

The above BCG report outlined that “a strong foundation for success is built on the understanding of an often-complex financial industry, including risk management and regulatory requirements. This experience also contributes to an existing pool of transaction data and working credit scoring models which offer an informed starting point”. In fact, a key compliance hurdle is that rules and regulations are in perpetual flux, with numerous new amendments and guidance issued with little notice.

For emerging players starting from scratch, organization structure tends to be lean and stretched. C-suite executives form the organization's backbone, and they are prudent in hiring as headcounts directly affect the burn rate. Often, they do not have the luxury of hiring headcounts dedicated to managing regulatory reports. The person tasked to generate reports for regulators faces ambiguity in the new setup, having to figure out which system to use and whom to approach for relevant data sets, not to mention the steep curve of compliance requirements and fast-changing regulatory and risk obligations.

As a bare minimum, digital banks need smarter ways to utilize data for end-to-end automation of processes. The ideal regulatory and risk reporting system is one with embedded regulatory content that is constantly updated to keep banks compliant at all times. Having a system to take care of the entire process of data translation, validation and enrichment of reporting will free up key personnel so that they can perform value-adding activities to build the business, which they are hired for in the first place, instead of spending time interpreting regulations.

In-house support is sometimes problematic when one cannot find the right staff. In a hiring market where FinTech and RegTech expertise is currently at a premium, the right personnel is difficult to identify, recruit and retain because the field is relatively new and those with the right skills and experience have seemingly boundless opportunities. Digital banks should therefore focus resources on building their businesses instead of interpreting regulations and ensuring compliance.

Cloud technology is a great enabler for streamlined reporting as digital banks need scalable systems to grow their business needs over time. They may consider the rising trend of software as a service (SaaS) for purposes of cost control, as well as the attendant security issues they will face with an on-cloud model.

Growth makes money and cost money

While it is true that compliance is the priority, the roadmap for digital banks goes beyond compliance when they expand their lines of products and complexity of offerings.

Fundamentally, as digital banks offer more products to market, they keep close eyes on balance sheet and interest rate risks, the two main tools for banks to discern their cost of fund. Instead of having a myriad of data sitting in different sources, a single view of automated, streamlined data allows the bank to manage interest rate risk and balance sheet and therefore understand sources of profitability to further optimize business strategy.

As digital banks continue to grow, adding more derivatives and credit products, they will require a more sophisticated engine for risk and finance calculation. Customisation of these systems could result in an insurmountable upgrade challenge if the banks started with siloed point solutions that initially cater to only regulatory reporting. Given the initial constraints of budgets, resources and timelines, digital banks should invest in modular and light solutions which can scale up with size and complexity. Such modularized and productised configuration and updates for Reporting Rules enable upgrades to be executed relatively more quickly and less costly.

APAC Digital Banks Figure 1

When investing in new technologies – or even to update or augment an organization’s existing capabilities – costs are unavoidable, both upfront and for ongoing maintenance. For example, concerning accurate, long-term costs, a Hong Kong exercise involving eight successful applicants saw their costs 50% higher than expected[3]. Most of the extra expenditures stemmed from IT infrastructure because extra need for development were added.

Another constraint is that of adequate in-house support. Most firms struggle to translate, build, test, and maintain the technology stack in-house cost-effectively – particularly when regulators update perpetually.

Going to market fast is survival, not bonus

To keep abreast of constantly changing regulatory reporting requirements, digital banks can leverage software solutions that automate business logic updates while streamlining data requirements and documentation changes. Doing so would significantly reduce time spent on analysis and developing and testing said changes.

New entrants should act swiftly in building the informational and technological infrastructure that will serve their businesses well in the future while concurrently showing regulators their commitment to serving their clients’ banking needs through superior technology and complete transparency. They may consider reporting solutions that are mature, tested and proven in the market so upon implementation, these new banks have the reports ready for submission, rendering speed to market. The sooner they start business, the sooner they reap profits.

Digital banks must, therefore, adapt quickly – with operational efficiency being the order of the day. If not, they will cease to be relevant and competitive against more established, better-resourced legacy banks.

Doing the right thing from the start

The traditional siloed approach to regulatory compliance creates a lack of transparency in calculations and reporting, resulting in high total costs of ownership and maintenance in the long run. For new banks, this impedes growth and undermines operational efficiency.

Digital banks can avoid this by starting on the right foot - having an architecture that enables end-to-end data lineage from source to report. This involves aggregating bank data into a single source to ensure consistency, accuracy, and ease of reconciliation, which can help them eradicate departmental siloes and address regulatory compliance in a prompt, resource-efficient manner. In essence, employing one database containing all consistent data and accurate information that in-house legal, compliance and risk staff need to do their jobs.

With numerous vendors in most markets, whichever service provider a bank ultimately chooses should have a proven track record of both expertise and experience in implementing practical, timely, cost-effective e-banking solutions under tight schedules while responding swiftly to dynamically changing regulations.

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