New Regulatory Approach and the Negative Impact on Bank Innovation

The approach regulators take to governing financial institutions has changed. New rules require banks to be more precise about the scope of a line of business and the processes used to deliver the product set of that business.

Regulators are adopting a shareholder perspective. In order to change an existing product or issue a new product, banks need to show shareholders that the bank is making an informed risk return decision. That communication needs to demonstrate that the product would be sustainable and the bank would be profitable as a result.

These changes demonstrate how banks are getting second-guessed by regulators on everything. Embedded regulatory costs are becoming exorbitant if not prohibitive, a point that is especially true for any initiatives that contain significant change management.

Treasury Strategies sees four likely outcomes:

1. For corporates, if you rely on any customized solution, both in terms of bank process or technology, you will at the very least have a difficult time changing banks. The worst-case scenario is that you’d be prevented from changing banks because the cost would be too high for bank providers to demonstrate the sustainability and attractiveness of your business under the new regulatory frameworks.  Many corporations will realize that they need to re-engineer their processes and data architectures to maximize flexibility and efficiency in their bank relationships.
2. At some point, most banks will offer very similar, basic products because differentiation on pure product functionality will become tougher, riskier and costlier to achieve.
3. Banks that have not invested in configuration capabilities will need to. It won’t scale effectively to execute one-off, manual customizations for individual clients any more.  To meet customer needs efficiently, banks must deploy technology infrastructures that are flexible.  Banks with outmoded systems may find that they face challenges in retaining and winning clients.
4. Banks will become increasingly reliant on 3^rd party vendors.  But while vendors will be better positioned to innovate, they will still need to meet the needs of banks to manage risks and exhibit regulatory compliance. Consequently, vendors will have to report on their systems, processes and controls just as the banks do. Vendors will also need to help their bank clients address risk and regulatory concerns by providing reporting and transparency, as well as dashboards, audit logs and other components.  For many vendors, this will require more rigorous product development activities to document processes, potential risks, mitigants and other effective control procedures.