Data governance and compliance are the lifeline of the banking landscape. The exponential growth of data makes it crucial for financial service institutions to ensure proper information management, utilization, and security. Compliance helps the banking industry meet legal requirements and follow the best practices and ethical operating standards. Non-compliance has dire consequences: in 2020 alone, many banks received hefty fines of over $11 billion. Banks must adhere to compliance to serve customers fairly and gain societal trust, including the Financial Service Authority (FSA). A banking world without FSA regulation can increase money laundering risks and other malpractices. Here are some reasons why compliance is top priority in the banking ecosystem.
1.Effective crisis management
Compliance and data governance are crucial in ensuring proper risk management within the banking sector. Without following compliance rules, banks may be unable to identify, assess, and manage data privacy, security, and management risks. Compliance laws and data governance controls help banks effectively monitor and mitigate operational, reputation, and financial risks. Naturally, any iota of negligence in the operational realm can attract humongous losses, considering how serious legislation has become in the industry. Routine risk assessments are crucial to identify vulnerabilities that need immediate attention. Compliance enables banks to make good decisions to enhance their overall management practices.
2.Avoiding bank failure
Banks may fail if federal or regional regulators conclude they cannot meet their financial obligations. Few banks fail yearly due to compliance issues, but there are occasions when many of them collapse within a short period. The 2008 financial crisis, for example, witnessed more than 400 failures within three years. Just recently, in 2023, popular U.S. regional banks like Silicon Valley, First Republic, and Signature Bank collapsed simultaneously. Predicting when a bank will fall is not easy. However, risk management and regulatory compliance play central roles. A banking institution may not survive if it doesn’t release its financial statements, customers rapidly withdraw their funds, or it fails to exercise due diligence during customer onboarding.
3.Avoid regulatory fines
A bank compliant with industry regulations can save money by avoiding fines from governments and regulatory authorities. Financial regulators may impose heavy fines on financial institutions that don’t comply with Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations to deter other organizations from non-compliance.
4.Fighting crime
Compliance helps fight other forms of financial crimes, such as money laundering, which is often connected with more widespread issues, including illegal arms dealing, human trafficking, terrorism, and drug trafficking. Anti-money Laundering compliance helps stop the flow of cash that finances other forms of crime. In 2022, AML fines on the global scale increased by 50%, an enormous figure expected to grow in the following years. Compliance in the banking sector plays a huge role in the fight against crime.
5.Data security
Data governance laws help improve data security in the banking space. Banks must ensure that customer’s sensitive information is well protected and that only authorized personnel can access it. If confidential information like credit card data is stolen or misused, it can help bad people impersonate, steal money, and potentially manipulate banking systems to work in their favor. Financial organizations like banks, accounting firms, and investment companies often handle personal financial statements, salary details, customer records, and transaction documents – all of which need protection. Data security measures like PDF redaction help banks comply with regulations like the Gramm-Leach Bliley Act (GLBA) and secure client data privacy.
Apart from banking institutions, other industries like education, government, legal, human resources, and healthcare follow a redaction guide to help deal with sensitive information. This allows them to comply with data protection and privacy regulations, namely the EU’s General Data Protection Regulation (GDPR) and the United States Health Insurance Portability and Accountability Act (HIPAA). The Payment Card Industry Data Security Standards (PCI-DSS) compliance helps banks protect customers’ security and privacy, mitigating data breaches, reputational damage, and legal risks.
6.Tax evasion prevention
Individuals and businesses may use unethical accounting practices to evade taxes. They may try to avoid paying taxes by concealing assets with fake identities. That is why bank fraud compliance teams develop KYC/KYB policies to verify their customers and ensure they use their real identities and act in their capacity. By following fraud compliance procedures, banks can help prevent tax evasion, so keep this in mind.
7.Foster trust with customers
Integrity is a core value in any financial institution. However, having great integrity requires a strong compliance culture. Banks prioritize compliance to protect employees, gain customers’ trust, and please shareholders. In designing an investment product, a bank must ensure it delivers its promise and vividly describes the risks to customers. Banks trade on various exchanges and platforms; compliance ensures they perform their transactions with real intent and not ill motives to manipulate the market and create ripple effects on consumers. Financial institutions often try to avoid conflicts of interest affecting their reputation.
8.Improves decision-making and business intelligence
Compliance equips banks with a wealth of data for accurate decision-making and business intelligence initiatives. By embracing acceptable data governance practices, financial institutions can guarantee data consistency and availability across multiple fronts, allowing stakeholders to access reliable information and facilitate smart decision-making. Effective compliance also improves analytics, data mining, and predictive modeling, making it easier for bankers to gain valuable insights and leverage market trends to drive strategic business development.
9.Boosts operational efficiency
Regulatory compliances benefit the operational efficiency of banking organizations. By adopting standardized management practices, they can streamline operations and overcome inefficiency. Data governance, for instance, reduces manual data handling duplication and promotes accuracy and consistency across various systems. A bank can enhance its data accessibility with automated workflow and integration, resulting in faster operations.
Efficient compliance encourages banks to adopt data-driven approaches, including AI and robotic process automation. These tools may automate repetitive manual tasks to reduce human error. Optimizing operations improves a bank’s overall productivity.
10.Enhances customer experience
Compliance also plays a crucial role in increasing customer satisfaction and experience in the banking landscape. Banks can instill customer confidence by prioritizing data security, accuracy, and privacy. Effective compliance helps banks update customer profiles and tailor their services through personalization and targeting. This allows them to deliver relevant marketing offers and recommendations to suit consumers’ preferences, improving their services. By providing personalized and consistent experiences, a bank can promote loyalty and differentiate itself in a competitive industry.
11.Maps requirements with activities
By using compliance management solutions, a bank can map each audit and corrective action to the requirements that necessitate the activity. This is visible across an entire organization. Managers may assign notifications on a compliance calendar so responsible staff can complete activities accordingly.
12.Facilitates digital transformation
In this digital revolution era, compliance is key for banking companies to embrace tech and innovation. Solid regulatory frameworks help banks effectively handle the vast volumes of information they generate from digital platforms like mobile apps, social media, and web transactions. This allows banks to get the most out of data analytics, machine learning, and automation, so feel free to consider this.
13.Aids investment in fast-evolving areas
Expansion in secondary industries provides financial service institutions with huge potential to invest in evolving areas. This is particularly true for areas that involve tech integration, business dynamics, products and services, and shifting customer expectations. Smart bankers can weigh the benefits of potential investments against competition costs and regulation. Compliance may offer ideas to cope with regulatory uncertainty and spell out implications for various investments. Emerging financial opportunities in data analytics is one area that may present compliant expectations. Some banking organizations partner with data analytics experts to provide credit processing tools. Banks may demonstrate the fairness of decisions and compliance with data protection laws if they base them on AI and algorithms. Compliance teams can assess these requirements and suggest profitable investment areas.
14.Resilience against political disruption
For global banking institutions, geopolitical tensions create rapid disruptions, especially when laws and regulations change in response to a country’s foreign policy situation. Institutions with international presence usually have complicated connections with countries. In most cases, such multinational organizations can rarely disconnect swiftly from a nation, partly due to compliance requirements. Systematically analyzing geopolitical scenarios often takes a while. For instance, companies with business ties with Russia had to analyze the implications of the invasion-related sanctions and play by the rules. Predefined playbooks for managing geopolitical tensions accelerate response, helping reduce the chances of outsized operational losses or regulatory fines. Banking compliance with international sanctions is helping the European Union, the U.S., and its allies promote peace in Ukraine,
Collaborating with regulatory bodies is essential for banking organizations. A healthy working relationship with regulators can simplify compliance efforts, making it less stressful to get clarification and guidance when necessary. Regulatory frameworks are dynamic with regular updates. Therefore, it helps to maintain effective communication channels with compliance regulators and adapt swiftly to new requirements, so keep this in mind.
Compliance is an important part of banking and for good reasons. Therefore, financial institutions should not take it lightly.
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