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US financial institutions already face incredibly complex regulations. What’s to come will only make things more challenging.
Why? A convergence of emerging policy priorities in Washington is creating a range of new compliance risks. This trend can have an increasingly negative impact on industry innovation by devoting time and resources that could instead be spent improving product development or customer service.
Institutions hoping to stay ahead of the regulatory curve will need to reinvigorate their compliance activities with a tech-first approach and bring compliance early into product or service development. This saves time and money and helps foster a culture of continuous innovation during the ebb and flow of regulation.
The future of open banking regulation
During the recent Money 20/20, Director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra announced the regulatory process, under Section 1033 of the Dodd-Frank Act, to develop regulations that will “enhance consumers’ access to and control over their financial information.”
This is an important step towards “open banking” and “open finance”, which will have significant implications for financial institutions that offer deposit accounts, credit cards, digital wallets and other transactional accounts.
Under this rule (due to be finalized by 2024), covered companies will be required to provide consumers with their financial information or provide it to a third party at the consumer’s instruction. Other proposals will also be considered, such as efforts to ease the process of transferring accounts between companies and new requirements regarding the privacy of personal financial information.
Disrupting the US financial sector
The overarching goal is to increase competition in the marketplace by making it easier for consumers to switch financial services providers, forcing companies to innovate and compete to retain customers. The regulatory impact will bring important new requirements related to customer data: data portability, data exchange, data security, data storage and more.
Banks and other companies handling personal financial data will need to make changes to their internal processes and digital infrastructure, such as establishing secure data sharing methods such as APIs, to comply with these regulations. Some companies will even have to adjust their business models.
Chopra viewed the initiative as one of the “most important rules the CFPB is working on or will ever work on in its history,” foreshadowing the wide-ranging impact the rule could have on the U.S. financial industry.
New Disclosure Requirements
Another regulation to check is that of the SEC rule require registrants to release robust amounts of information on climate risks and greenhouse gas emissions, to be finalized in the coming months. Disclosures require extensive reporting and information sharing about companies’ environmental practices and strategies, especially around reducing emissions, creating new compliance hurdles.
In addition to Article 1033 of Dodd Frank and ESGfinancial institutions need to prepare for new compliance requirements related to digital assets (particularly cryptocurrency after the collapse of the FTX), data privacy, cybersecurity and more. In the coming era of divided government, President Biden is likely to become more dependent on executive orders to advance his regulatory agenda.
Compliance costs for banks are already there increased an estimated 60% since the 2008 economic crisis, and the fact that these regulatory challenges may arise during the day a recession makes it even worse.
New solutions for a new era
During economic downturns, companies are forced to stretch budgets and make tough decisions about their workforce, growth strategy and product development. Rising compliance costs are not helping. All the extra dollars spent navigating CFPB, SEC or Treasury regulations reduce budgets for innovation, impacting individual companies, the economic competitiveness of the US and the financial industry as a whole.
Compliance will nip innovation in the bud unless business leaders bring innovation to their compliance systems and processes to maximize efficiency and minimize costs.
Additional training and manpower are likely part of the solution, but the main focus for compliance teams is adopting new technologies that more quickly identify new or relevant regulations and better coordinate business activities.
Adopting and deploying enterprise software solutions that rely on artificial intelligence (AI), machine learning (ML), and cloud computing is the most cost-effective and efficient solution to an increasingly complex and expensive regulatory environment.
Compliance part of the “innovation engine”
Still, just having the latest technology is not a panacea. Forward-thinking FinTech innovators are also changing the way they work with compliance to maintain their pace of innovation. Compliance teams should be engaged during the early stages of product or service development, even during conception.
Integrating compliance feedback and expertise during development can significantly reduce delays caused by compliance challenges. Compliance should not be seen as a “gateway to go through” in the final stages of product development, but as part of the innovation engine that drives companies forward.
It is impossible to fully predict the future regulatory landscape. But with the right tools and workflows, financial institutions and FinTech innovators can work smart to minimize risk while maximizing innovation.
Kevin Jacques and Ben Malka are partners at Cota capitala San Francisco-based technology investment firm.
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