From Bitcoin to Basel – why banks must get to grips with regulation and emerging technology

by Shakir Ladak, CTO, Alpha Insight


Still reeling from the aftershocks and legacy of the financial crisis, the UK’s retail banking sector faces more long-term challenges. These include the increasingly complex requirements of the regulatory authorities and the transition of the banking market to potentially disruptive digital technologies, payment mechanisms and the rise of digital currencies such as Apple Pay, Google Wallet, Paym, JP Morgan’s new Chase Pay and Bitcoin.

Now actively being tested for their “limitless potential” by banks, insurers, technology firms and even some governments, internet-based block-chain technology such as Bitcoin and other crypto-currencies have the potential to cause widespread disruption, not least because they do not require intermediaries.

At this early exploratory stage, there is still a long way to go before block-chain is proven enough to secure regulatory backing. However, should the underlying technology be widely adopted, it could expose the vulnerability of many institutions, including the banks.

Increasingly, established banks are also coming under pressure from challenger banks with lower overheads, as well as financial technology companies rolling out consumer-facing digital functions that threaten to reduce them to little more payments utilities.

As banks undergo substantial reconfiguring to cope with these many threats and challenges, they come up against the fractured nature of their IT estates, which have been created in response to specific opportunities or requirements.

This inevitably means they have a very poor understanding of which of their millions of metrics is critical to their business, making real-time monitoring well-nigh impossible.

Take payments for example, where changes to the regulatory regime are also likely to add to complexity. Currently in draft form, the EU Payment Services Directive, which is expected to come into force in 2017, aims to open up the payments market to competition from non-bank entities.

In addition to opening the door to fintech companies and retailers as competitors to banks, rising consumer demand for faster payments may in turn lead to consolidation in clearing services.

However, as banks look to keep pace with challengers in the market and focus their attention on digital interactions, it is crucial that they keep the requirement to comply with current regulation front of mind. If not, they not only risk crippling fines but also significant reputational damage that knocks both industry and consumer confidence in the brand.

Recent high-profile failures by UK banks to complete hundreds of thousands of payments highlight the sheer scale of the problem. A key part of the challenge with the complex legacy systems monitoring millions of transactions is that banks are not alerted when critical processes are heading towards failure. This lack of visibility means that when a significant increase in transactions occurs, they do not know if the system is coping until it is too late.

Addressing this challenge involves deciding what is really important from among the billions of possible metrics and crucially, applying the right business logic. While all banks have monitoring tools, many of these fail to provide the kind of relevant, real-time analysis that would give banks the chance to intervene before processes collapse.

Likewise, this lack of visibility and relevant information can also be a key part of the challenge for banks working towards compliance with the Basel Committee on Banking Supervision’s regulation BCBS239.

Coming into force for the large banks in January 2016, the regulation demands risk reports are timely, complete and accurate. However, as this is a set of principles, rather than a defined set of metrics or KPIs, inevitably many banks are struggling to understand how they should measure themselves against its new requirements.

The answer is to keep things simple from the outset and define only what is critical, rather than getting lost in thousands of additional KPIs which do not add value. Crucially, the real-time monitoring of these fundamental KPIs needs to be embedded into everyday processes, rather than sitting in a solution that adds another layer of complexity. Proactive alerting through traffic-light monitoring can be built in so that potential problems are flagged up at alert or warning stage, rather than when they reach critical status.

Here, a tool that can be embedded within conventional monitoring solutions will deliver substantial value. It should be designed by experts who use their experience to establish what it is within every business flow that is critical and requires real-time monitoring. This is especially true if it can be implemented as an add-on technology, without the need to overhaul an entire IT estate.

For compliance with regulation and the bank’s own best-practice processes, once key metrics have been established, performance can be measured against them. They will supply much-needed business context and insight – all of which is key in a market that is increasingly characterised by the conflicting forces of technology change and industry regulation.

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