How Digital Banks Can Build an Integrated Data Management System
ComplianceAugust 26, 2020

How digital banks can build an integrated data management system

Digital banks and other FinTechs are emerging as more nimble competitors to established legacy banks. The digital banks that are on their way to becoming fully chartered have the opportunity to set up fully automated processes and systems without legacy systems getting in the way.

As essentially greenfield sites, digital banks have the chance to eschew manual processes for many business functions, and regulators are actively discouraging them from taking a manual approach to their regulatory reporting obligations. Instead, banks applying for a charter need to prove they have a robust risk and regulatory reporting plan with the ability to be in production quickly and scale with rapid growth. The ability to quickly implement an operational platform to start business is a key consideration for regulators.

Many newcomers are electing to adopt automated reporting systems to meet the demands of the regulators while at the same time bringing significant operational benefits. These include reduced time to market, a reduction in errors and lower operating costs.

Applying for a charter is a significant undertaking for emerging digital banks. Putting in place sound reporting processes and systems that connect to your core banking data to data driven applications will help you accelerate and maintain your business applications, including; regulatory reporting, risk management, finance reporting, performance managements and business analytics. This will help you avoid the pitfalls of data inaccuracies that characterize legacy technologies and resultant operational disruption, and regulatory penalties endured by traditional banks.

So, what is needed to build a robust, integrated finance and regulatory compliant data management system?

Four Areas to Consider

New entrants can build a solid foundation for the future while demonstrating to regulators their commitment to putting in place the elements necessary to improve the financial health of their customers through superior technology and total transparency.

1. Align Systems Deployment with an Optimal Staffing Model

As with any early-stage venture, pre-charter banks are frequently challenged by limited access to valuable resources, and staffing is no exception to this. As a newly formed digital bank or aspiring bank, your staffing resources may have limited IT and regulatory and financial reporting expertise. If the business plan is to restrict headcount as the firm builds traction, it will be important to consider the technology solutions and partners you bring on board to help you scale.

This is where new ventures can benefit from the freedom they enjoy from the restrictions of legacy systems. Those building banks from the ground up have the luxury of following best practices from the outset. This extends to designing and implementing technology solutions that relieve existing staff from having to make manual interventions to, for example, adjust business rules to manage changing regulatory requirements, maintaining quarterly updates and other issues arising from the reporting process.

There are additional human resources benefits from implementing an optimal, future-proof technology platform. First, with no legacy systems to worry about, firms don’t need to hire legions of consultants to keep aging platforms running and up-to-date with today’s requirements. And with no end in sight to the current trend of working from home - necessitated by the Covid-19 pandemic - modern platforms offer banks the ability to manage systems remotely and the flexibility to hire and deploy staff around the country or even globally.

2: Put in Place a Robust Data Management Framework

To meet the rigorous demands of today’s regulatory and financial reporting environment, financial institutions need to implement a robust framework to manage data collection, normalization, integration and distribution in support of their regulatory reporting obligations.

To meet your every-day data driven challenges, consider how your core banking data might work with other data driven applications. Since BCBS 239 published principals for effective risk data aggregation, the banking industry was encouraged to achieve greater data standardization, implement greater controls and institute higher data quality – all resulting in higher levels of regulatory reporting accuracy.

This points to the need for a robust and industry-proven regulatory reporting solution. Regulators are demanding that regulated entities put in place first-class records-validation functionality to meet their data quality requirements. These systems must be able to identify and filter out data anomalies at the beginning of the platform’s ETL (extract, transform, load) data ingestion process.

This ETL validation process should engage at the data records sourcing and origination stage. It should continuously qualify all table records being ingested for key BCBC 239 data quality indicators, with checks for accuracy, completeness, validity, integrity and comprehensiveness. Finally, it should give users the flexibility to adjust these data quality dimensions to fit the overall objectives of the organization’s data governance framework.

With regulators keen to understand the provenance of the data in the reports they are receiving, the data management platform must provide data lineage capabilities that allow the bank to identify any changes to data records. This includes changes from source banking systems and rules transformation workflows. The platform must also offer standard integration, with support for end users, internal IT controls and data auditability.

This kind of greenfield data management approach further differentiates the disruptor offering from traditional banks, for which the crushing data management costs resulting from the 2009 credit crisis are being compounded by new disruptions from the Covid-19 pandemic. Digital banks can build a strategic data management system that aligns regulatory and financial data for operational efficiencies, analytics, and better business decisions as they grow – something that wouldn’t have been envisaged pre-crisis. Regulatory reporting data requirements now include substantial risk data elements, and new entrants need a platform that is sufficiently comprehensive in terms of its ability to handle a broad range of data if they are to take full advantage of the opportunity of adding a new system from scratch.

Data Management Best Practices Checklist

Here are some best practices when thinking about building your data management infrastructure:

  • Do you have a robust validation ETL to bring data from external systems?
  • How will you validate the data to ensure quality to prepare for external reporting requirements?
  • Is your data ready to report to the government and your own internal data governance teams?
  • Have you built in best practices from Day 1 to help you as you grow? With explosive growth on your balance sheet comes increased regulations. You can limit exposure to regulatory change with systems that monitor these changes and provide updates, allowing you to rest assured you are meeting these ever-evolving requirements.
  • Do you have the proper staff and outside partners to ensure a best practice framework is set up from the start?

3: Embed Scalability & Flexibility into the Business

For entities starting out on the journey toward chartered status, it is imperative to ensure operations scale as the business grows, with standardized access to data for regulatory reporting, financial reporting and risk aggregation. This requires banks to view any investment in reporting and underlying data systems from a holistic, long-term perspective in the context of their overall business strategy.

When selecting a vendor platform, it is important to evaluate this in the context not only of current business requirements, but also of future business needs. Regulatory report forms, data fields and classifications are constantly changing, with updated versions of major reports usually issued each quarter. It is essential for any platform to allow the bank to maintain the appropriate data over time to meet these changing needs.

The ongoing stream of regulations in the banking sector means that new regulatory pronouncements and accounting standards are released each year. To achieve chartered status, it is critical that new banks have in place financial and regulatory reporting systems that allow them the flexibility to readily incorporate functional changes in their system in order to adopt the new reporting standards prescribed by regulators.

Scalability is also a key element of any regulatory reporting solution. Given the pace of new financial reporting standards and regulatory requirements, digital banks may be best served by partnering with commercial vendors. Specialist suppliers often have the experience and knowledge required to help clients meet their regulatory obligations, and continuously monitor these changing demands. This allows them to ensure their solutions are scaled appropriately, with enhanced functionality to quickly adopt new rules or add new dedicated modules that can be easily integrated with their core banking system.

Building in Scalability and Flexibility: Pitfalls to Avoid

Selecting the proper engagement model to meet your needs is just as important as selecting the right vendor. Key factors to consider that are often overlooked include:

  • What types of account and transaction volumes are you projecting five to 10 years from now?
  • Will the solution easily scale to meet them or will it require an upgrade / replacement?
  • Does the solution run on on-premise hardware that will require upgrades over time, on private cloud environments (such as from AWS, Microsoft Azure or Google, as an example), or is it a software-as-a-service (SaaS) solution hosted by a vendor?
  • Are there adjacent legacy systems, gaps, or manual processes, and can and should these be automated as part of the project?
  • If not automating today, is there potential to absorb these in the future?
  • How can the bank extract the maximum value from its investment to assist in making business decisions and eliminate duplication of effort in other areas?
  • Are there other external or management reporting processes that require the same data? 
  • How are regulatory changes implemented over time?
  • Are changes delivered in a simple patch or update on a recurring basis, or do they require analysis from subject matter experts? 

Does the bank plan to maintain production applications itself, or would it prefer a vendor to own this aspect through a SaaS or other vendor-hosted solution, or Software Management Services contract (on-premise hardware or private cloud)? 

4: Define and Pursue a Strategy for Growth

Regulatory and financial reporting represents a key consideration for banks seeking to maintain an effective cost structure as they grow. As part of the federal government’s charter approval process, you will have to demonstrate that your organization has the core competencies and appropriate systems to manage regulatory change over time.

Compliance is typically seen as a cost center, requiring high-skilled employees with specialist expertise. This can come at a high cost, which makes partnering with a knowledgeable and proven technology supplier a compelling option for newcomers.

Growth Strategy: Things to Consider

Here are some of the key considerations emerging banks need to take into account as they put in place their strategy for achieving scale:

  • How will your planned growth strategy impact your financial and regulatory reporting burden, and what additional reports are you likely to have to file in the future?
  • Can the ability to address these reports be added to the initial build, since a small investment now can eliminate the need for a major expansion project further down the line?
  • Will the platform support future product or geographical expansions and/or potential acquisitions?
  • If selecting a vendor solution, is there a plan in place to address any future gaps before they become production issues?
  • Does your future headcount strategy account for the need for a larger reporting team?
  • Robust financial and regulatory reporting has three core components: systems, processes and resources. A suitable commercial solution should institute systems and processes to fit and scale with your planned regulatory workload and resourcing level. It should also be able provide access to expert resources when required, without the need to expand your full-time payroll and headcount.

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