On the surface, big banks and fintechs are not obvious bedfellows. One is an edifice of the old ways; the other, a fast-moving disruptive force eager to shake things up.
But in practice, established financial institutions have a lot to gain from working with their newer, nimbler counterparts. Fintechs invariably emerge to solve specific problems, giving them granular know-how of particular pain points plaguing traditional firms.
Take, for instance, the thorny issue of transaction reporting — the bane of every bank involved with financial messaging, but an area in which specialised, tech-savvy start-ups are taking huge strides.
Tighter transaction reporting rules
In today’s highly regulated financial market, good transaction data management is paramount. This is true particularly when it comes to transaction reporting — an obligation on banks that emerged in the wake of the financial crisis, changing the way in which they record and relay information to regulators.
“Since the Great Recession, regulators have asked for more and more visibility on transaction data,” says André Casterman, chief marketing officer of Intix, a provider of transaction data management solutions. “For banks, it’s become a necessity to continually access historic and recent financial data to meet stringent regulatory requirements.”
These tighter transaction reporting rules are fundamentally about fighting financial misconduct. Hidden in the deluge of data banks handle every day, there is evidence of money laundering, corruption, organised crime, illegal exploitation of natural resources, fraud in international trade, and tax evasion.
To ensure no suspicious transactions slip through the net, financial institutions need access to all their archived messaging data, across all channels and all standards, all the time. With colossal quantities of multi-format information buried deep within ageing systems, this can be a complex and costly undertaking.
A burden that is getting heavier
Fifteen years on from the global financial crisis, the transaction reporting burden is getting heavier.
Surging payment volumes are a big part of this, with financial institutions having to process tens-of-millions of transaction messages daily. This data is hoovered up and deposited into highly secure financial archives spread across several servers, each operating a unique format or standard.
Locked away in legacy systems, layer-upon-layer of messages accumulate over time, making it difficult for reporting teams to source specific information when authorities come calling. At the same time, global reporting regulations are getting tighter, as are the timeframes in which banks are required to respond.
All of this heightens the risk of falling short of regulators’ expectations — an expensive transgression for those found to be guilty. In 2019, Goldman Sachs received a record $45m fine from the UK markets watchdog for failing to provide accurate reporting of transactions over the preceding decade, while, for a similar offence, investment management giant UBS AG was ordered to pay almost $27.6m.
Agile and laser focused
On threat of such hefty financial penalties, would it not make sense for banks to overhaul old internal systems to streamline the reporting process? In theory, perhaps — but, as Casterman notes, root-and-branch digital reform is itself achingly expensive.
“It’s more cost efficient for the banks to keep on using the technologies they have, technologies that have been proven to work well in many regards, but simply aren’t capable of performing reporting tasks in line with changing regulatory demands,” he says.
With their laser focus on specific issues — like transaction reporting — fintechs have proven themselves adept at building on top of pre-existing systems to enhance data management functions. Off-the-shelf software solutions can, for instance, dredge up transaction data contained deep within legacy servers, providing banks an arsenal of information to meet regulatory requests.
These requests have evolved significantly over the past fifteen years and continue to do so. Inherently more agile than their conventional counterparts, fintechs can adapt and upgrade their products to satisfy shifting requirements.
This is particularly relevant when it comes to the speed at which reporting is now expected to take place. Gone are the days in which banks had weeks or even months to respond, with regulators now requesting reports within hours.
Fintechs can keep pace with these tightening timeframes, Casterman says, because their solutions need not be implemented on data lakes, but rather act like internet search engines, allowing banks to quickly locate relevant financial messages regardless of format. This sort of real-time functionality is also extremely scalable — a real asset with regulators demanding reports of increasing volume and detail.
Game changing automation
Looking to the future, there seems little doubt that these regulatory demands will grow any less onerous. It’s for this reason that continued innovation is vital, with new technologies developed to meet ever-stricter rules.
It is not just regulatory requirements that are evolving, however. Financial messaging formats are themselves becoming more detailed with the arrival of ISO 20022, SWIFT gpi, and the P27 Nordic payments system. These new structures have many benefits, but their richer data formats present a problem for banks’ legacy IT.
Fintechs are well equipped to stay ahead of the curve with their continuous product development and technological innovation. Great strides are being taken in the field of artificial intelligence (AI), for example, which promises ever-more sophisticated and scalable data management.
“When you have a lot of data, you can apply machine learning to start predicting and identifying what human beings cannot, given the increased volumes of data involved in the banking sector,” says Casterman.
“AI engines are going to be a game changer for operational speed, for highlighting transaction issues, and for targeting specific data that needs to be located for reporting purposes.”
An ally, not a rival
For all institutions involved with financial messaging, fintechs should be seen as allies, not rivals. Their bespoke expertise and unmatched adaptability can be the difference between successfully navigating the regulatory process and falling foul of reporting requirements.
Traditional financial institutions know the value of future-proofing their operations, but wholesale digital reform just is not viable. Fintechs represent a means of smoothing the transition from old to new without uprooting established systems, ensuring banks are ready for whatever the future may bring.