The banks are still being affected by post-pandemic-fueled regulatory change, political disruption in Europe from Brexit and the war in Ukraine. Biden’s US administration is making key regulatory changes that will likely tighten banking oversight. European financial services companies are preparing for new regulations in relation to UK/EU trade agreements.
Banking compliance officers, says Riskkonnect, will want to keep a close eye on current regulatory obligations and associated controls. But that’s only half the battle. Regulations require huge amounts of data and documentation from multiple policymakers. And you must be able to translate that information into action to update processes, controls, and policies. Failure can lead to hefty fines.
The pandemic accelerated digital transformation within the banking sector. Consumers embraced digital platforms hungrily to access many products and services, which has pushed technology to the forefront of the strategic agenda for many organizations.
Digital transformation is still a relatively grey area for banking compliance, with no one-size-fits-all approach to how it should be regulated. Regulators are struggling to keep up with digitization, especially in machine learning, artificial intelligence (AI), and big-data analytics.
Now, at what point should regulators intervene with a bank’s digital-transformation efforts? Regulation in general, has a nasty habit of hampering innovation if introduced prematurely – but it can cause significant disruption if applied too late.
The cost of compliance is so great that it can interfere with the ability to innovate, deliver customer value, and reduce operating costs. And reducing spending on regulatory compliance cannot be easily achieved, especially when penalties for noncompliance remain high.
As the world’s leading provider of packaged banking software with 3,000 banks as customers, our vision at Temenos is to help our banking clients out of the vicious circle of low profitability and make them more efficient.
The Temenos Value Benchmark Program
To this end, we launched the Temenos Value Benchmark (TVB) Program in late 2018 to provide our clients with tangible, data-driven insights into their business performance in the spirit of a true strategic partner rather than merely a software provider.
The average return on equity for participating banks in the Temenos Value Benchmark at 16.4% is significantly higher than the current industry average return on equity of 9.5%. This differential translates into a massive additional one trillion USD profit potential for the global banking industry
The Temenos Value Benchmark white paper communicates the tangible drivers of business performance in the banking industry. It is based on a data collected from the Temenos Value Benchmark program, comprising more than 100 retail, corporate and universal banks from across the globe.
According to Temenos’ research, the total average compliance spend can be equivalent to 6.7% of revenues, 69.5% of which are attributable to FTEs. This is even more onerous when you consider that, on average, only 32.4% of a banks’ IT budget is dedicated to growth and innovation. The rest is maintenance and the cost of “keeping the lights on”.
However, experience tells us that the more digitalized a bank is, the higher the compliance staff efficiency. Maintaining an efficient compliance function contributes positively to the bank’s financial performance. Compliance is an opportunity to reduce operational and reputation risk, enhance the customer experience, and lead to even higher overall digitization.
Banks have to deal with persistently harsh macroeconomic conditions and geopolitical uncertainty. With the rise of new competition and evolving customer demands, crippling legacy architectures, incumbent banks have an immense opportunity to harness the power of digitization to transform their business. Recognizing our role as a true strategic partner to our clients, we introduced the Temenos Value Benchmark program in 2018 to provide clients with tangible data-driven insights on the business value enabled by their investment in IT.
Nearly 50 retail, corporate and universal banks across the globe have participated so far. An analysis of the data collected highlights that our top-performing clients already achieve industry-leading cost-income ratios of 26.8%, half the industry average and returns on equity of 29%, three times the industry average.
These clients also invest over 51% of their IT budget on growth and innovation rather than maintenance. This is double the industry average – a sure way of keeping the regulator happy. In part two of this blog, we share our analysis of the critical factors that differentiate high-performing banks from average performers, focusing on the industry’s tangible drivers of business performance.
Read more about Compliance as a Driver of Banking Performance and discover the insights from the Temenos Value Benchmark Whitepaper.