Following the wider political turmoil of the last few years, it is easy to take a foreboding look upon the future. A tumult of complex, tough regulations from MiFID II, to the Payment Services Directive (PSD2), to the General Data Protection Regulation (GDPR), appear to loom like a storm on the horizon – threating a paperwork headache at the very least.
At any rate, the series of regulations for financial services have been largely described in the media as ticking time bombs that, if not diffused in time, will tear your business apart and open it up to the ravages of a swarm of Fintech disruptors. Or so appearances would suggest.
But if approached in the right way, these new rules actually offer a bright opportunity for banks and financial services providers in 2018 to make their processes and business offering better and more efficient, as do the emerging technologies that will help companies to comply with them.
Let's take PSD2 first, which comes into force in January next year, as part of the Open Banking Initiative. The regulation is aimed at improving competition in the financial services market, opening up traditional banks' customer data to newer challengers.
Banks will have to open up their data to these third parties through application programming interfaces (APIs), which may require a huge deal of outside programming expertise.
Fintechs and large tech giants will be able to branch into payment services directly, taking away part of banks' business. Aggregator sites will be able to group a customer's account details together and make recommendations as to how they could save money with different providers.
This could put banks on the back foot against agile, often lower-cost Fintechs, who are winning over banks' customers with speed and personalisation. Unlike the more agile, cloud-based systems of new challengers, some banks are still stuck with a patchwork of outdated legacy systems which have been repeatedly and haphazardly extended and added to, leaving them inefficient, unstable, and open to risk and compliance issues. But technology is at hand to solve this.
A number of banks are already turning to outside expertise, using cloud-migration programmes to cut out their legacy systems and move operations onto the cloud. If PSD2 adds a further encouragement to shift away from outdated legacy systems, then it is a good thing for banks.
Migrating to the cloud will allow banks to more seamlessly overlay new technologies onto their systems, streamlining processes and pooling data all in one place, with huge business benefits. For instance, from this platform AI and automation technology can be used to dramatically speed up processes, reducing costs and creating savings that can be passed down to the consumer, for a more competitive offering to match the Fintechs.
Cloud computing also offers greater fluidity to access data. This will be all the more necessary next year, as increased use of Internet of Things devices continues to add to the pile of data banks can gather on their customers.
The issue of customer data, however, brings us onto its governance and security, which the GDPR is designed to protect. The regulation will increase obligations to store customer data in a simple, efficient way, and only grant access to data where it is used in a way that brings value to the customer.
One of the greatest challenges this poses for banks is making sure they have the systems in place to detect any kind of data breach within a very short amount of time. But if anything this is a spur to take a necessary business action.
Banks need to be secure about their customer data, and not only in order to comply with regulations. Customers need to be able to trust them and use their services, and banks need to avoid the huge financial damage that a hack into customer accounts would mean to the bank.
And it is not only a security issue. Banks need to use data in an efficient way that benefits the customer as well as the business. The drive to keep track of where data is stored, and only allow data access for parts of the business that need it, will offer a good opportunity to streamline and consolidate data systems. It will continue to guide banks to new, more efficient and secure data storage solutions, such as distributed ledger technology such as blockchain.
To implement all of this, banks are increasingly turning to external expertise to help them, from outsourcing business processes to importing specialist consultants. This offers large, established banks a way to ease transition into more complex developments in technology in an informed way.
The regulatory pressure facing financial services providers next year is a certainly a challenge: but it is an opportunity to ultimately improve efficiency and services. To comply with regulations and respond to their effects, banks will be under pressure to make 2018 a year of great innovation.
Farida Gibbs is CEO of Gibbs Hybrid.