As 2015 comes to a close, the economy is its strongest in years. Yet new federal regulations enacted to prevent the sorts of business practices that contributed to the recession of 2008 have given CEOs in the financial industry a lot to think about. These are some of the most current trends and pressing issues confronting today’s financial industry.
It has been over five years since President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. “The most far-reaching Wall Street reform in history, Dodd-Frank will prevent the excessive risk-taking that led to the financial crisis,” said the White House. “The law also provides common-sense protections for American families, creating new consumer watchdogs to prevent mortgage companies and pay-day lenders from exploiting consumers.” Dodd-Frank demands that financial service professionals make significant changes to the way they conduct business.
Seemingly, tighter regulations will continue to affect how companies monitor, respond to and communicate concerns. Increased oversight of organizations has trickled down to employees — the result being greater accountability and stricter consequences. Dodd-Frank has elevated the need for more stringent background checks in hiring and a greater emphasis on a candidate’s ethical track record as well as their performance.
Introduced incrementally, Dodd-Frank comprises a whopping 400 pages of regulations that business leaders must understand and put into practice. By the beginning of 2015, says Deloitte, banks had shifted their focuses from understanding the new regulations to implementing and complying with them. Implementation and compliance efforts will continue into 2016 with the enactment of the Volcker Rule, a component of Dodd-Frank that became law for large banks in July 2015 and will impact smaller ones in 2016.
For banks to achieve regulatory compliance, they require a talented workforce with expertise in a variety of specialized areas. This is good news for those trained as financial analysts, KYC (know your customer) specialists, forensic researchers, data scientists, client services specialists, cloud engineers, regulatory analysts and loan processors.
During the financial crisis, it became obvious that financial institutions’ risk management strategies were sorely inadequate. Fines levied on banks for failing to comply with new regulations and existing ones has sent shocks to the system that are driving a focus on quality, risk management and proper oversight.
As a consequence of Dodd-Frank, banks are now subject to “increased scrutiny from regulators on risk management operations and practices, relentless cost pressure on risk infrastructure, risk functions and risk processing and higher expectations from the board, top management and the business to improve risk management effectiveness and demonstrate value add to the business,” reports EY.
This means that most boards of directors and C-Suite leaders are spending a lot more time and money on risk management. Across the banking industry, companies have board risk and auditing committees to insure greater oversight of business practices. Now that business leaders have acknowledged the importance of risk management, the role of the chief risk management officer has gained stature, changing the balance of power in the C-Suite. According to EY, today, “81 percent [of CROs] report either to the CEO or jointly to the CEO and risk committee.”
Advances in technology have changed the way money is managed and the banking industry must move quickly to keep pace and retain customers. Millennials, who now make us the largest labor force in the U.S., are skeptical about the value of traditional banking is particularly challenging.
According to Millennial Disruption, a 2015 study by Viacom Media, “73 percent would rather handle their financial services needs with Google, Amazon, Apple, PayPal or Square than from their own nationwide bank.” If banks are to succeed in our increasingly technologically sophisticated society, they must embrace new ways of doing business.
This point is reiterated in Accenture’s Banking 2016- Next Generation Banking report. “Today, customers expect data instantly, as quickly as they can pull a mobile phone out of their pocket and tap in a query. In five short years, three of every four customer interactions will by online or mobile … [banks] must find and claim their space quickly. Already innovators like Google Wallet, Square in the United States, or iZettle in Europe and Alipay are moving into banking territory — presenting a new competitive challenge in the industry. By 2020, 30 percent of banking revenues could be at risk thanks to new competitors and new trends.”
Innovation isn’t an option. It’s a survival strategy.
As cyber-attacks have become increasingly common, banks are beefing up fraud departments and have become far more diligent about monitoring illegal activities. They are instituting policies and procedures for investigating and reporting suspicious activities such as identity fraud, money laundering and even terrorism to insure they are not unwittingly enabling the financing of dangerous criminals.
“The ‘KYC’ (know your customer) ethic remains strong,” says Deloitte, “but now ‘know your vendor’, ‘know your employee’ and ‘know your data’ are riding alongside KYC.”
Every relationship, every connection outside and inside your organization has the potential to cripple your business if not properly vetted and continually re-evaluated. The stakes are simply too high not to.