The transformational technological innovation of the past decade has not only helped widen the range of services available to individuals and corporates – it has also significantly increased access to information and knowledge. Making informed decisions has become easier for people, irrespective of where they (and their internet connection) are based. While this has been a huge step for human and business growth in terms of global collaboration, it has also created risk. In November 2018, the Indian police arrested more than 20 people on suspicion of defrauding individuals globally, with the plaintiffs being the FBI, Interpol and Microsoft. Only now, years after such cells were set up are enforcement and regulatory bodies succeeding in uncovering illegal activities of such magnitude. This type of fraud is just one example of the pitfalls of technological advancement. Another example is high-frequency trading. Even though the financial sector is heavily regulated, there have been several instances, including the 2010 Flash Crash and Knight Capital’s 2012 loss of $440m due to a trading error. Although unintentional, the incident wiped out 75% of the firm’s equity value within days. The authorities have since introduced stricter regulations in the form of MiFID II (in Europe) to manage these risks, but uncertainty remains over what algorithms can do.
While fintech continues to flourish and encroach on rigid and traditional processes, blockchain, artificial intelligence and robotics have also entered the sphere. Their potential is not limited to innovation and investment either, but has spilled over into politics and the media. This raises the question as to whether the existing compliance and operational departments are ready to deal with this level of disruption, and if their toolsets are adequate for the challenges that lie ahead. Judging from recent events, it seems unlikely. And since big financial institutions have generally been conservative in adopting new technology, they are now facing immense disruption. With fintech now eyeing payment services, competition in the sector has increased substantially. Digital payment firms, such as Venmo and Revolut, are continuing to take market share from incumbents, while Apple IPay and Google Pay are additional threats that didn’t exist a decade ago. Regulatory initiatives like Open Banking mean that traditional banks no longer have control over the end-to-end ecosystem. They now need to work with new industry challengers that see technology as a core offering within their business.
The influx of advanced technology has not only revamped the sector from the inside, but has also profoundly changed the workplace and workforce of the future. These changes have shifted work culture and the way employees work on a daily basis. With repetitive jobs out of the picture, the focus has shifted to innovation and how to deliver disruption. The challenge now is to identify the cause of the problems and develop a long-term solution rather than fix the issue temporarily. Banks also need to develop a close working rapport with regulatory authorities to build a globally standardised framework to ease the pressure that comes with the introduction of new regulations. The current regulatory requirements come with complex formats, which can be difficult to decode. Simpler outcome-based standards with foundations based on the ‘right’ behaviour will better serve the goals of being compliant. As with anything in the financial sector, the key focus for talent selection is now more about technology and less around specific sector knowledge and experience. Used correctly, disruptive technology can form a protective force to herald the move of centuries-old financial institutions into the future. There is no doubt that compliance can’t compete with technological innovation, but it can certainly adopt it.
Harpreet Singh is executive director at Brickendon, a consulting firm