Large global financial institutions are utilizing advanced technologies like never before to help manage their regulatory compliance needs, driving major efficiencies within compliance, risk, and internal audit functions in the process.

Prompted by the COVID-19 pandemic, the financial services industry, like all industries, had no choice but to come up with new and innovative ways not only to interact with people but also continue to conduct site visits, even in the face of stay-at-home orders and global travel restrictions. So, it’s not surprising 100 percent of respondents to a recent global banking study conducted by FinTech research firm Burnmark, in partnership with RegTech provider CUBE Global, called 2020 “a year of major transformation for their organization.”

Nor is it surprising 93 percent of respondents across the 160 global banks and financial institutions surveyed said their organizations launched a digital product or digital service between January 2020 and March 2021. What is more telling is how they are using these alternative data and advanced analytics to reduce their compliance risks.

Specifically, the top three types of alternative data sources being used today are geolocation data (cited by 80 percent of respondents), phone usage data, and spending patterns (each 60 percent). Other common alternative sources are biometric data, psychometric data, and social media data (each 40 percent).

To cite just a few examples, as described in the study, some banks are using biometrics (body measurements and calculations) to verify identities; machine learning to prevent money laundering by analyzing customer behavior and transactions; and anomalies in data patterns or transactions to detect fraud.

On a more granular level, consider these specific examples:

  • Barclays now offers finger vein biometrics for its corporate clients. Developed in collaboration with Hitachi, the infrared technology scans users’ unique finger vein patterns, eliminating the risk of PIN capture, identity fraud, or the sharing of account details.
  • Standard Chartered has been working with technology provider Silent Eight since 2018 to develop and implement name screening technology, which involves using machine learning and natural language processing to check individual names against a sanctions watchlist. This has helped reduce not only false positives but also time spent on transaction monitoring and investigations, the bank stated.
  • Santander uses selfie-based onboarding and authentication technology that matches customers’ selfies against their official identity documents using facial recognition, which helps reduce financial fraud risk.
  • Goldman Sachs is leveraging drone technology to give prospective M&A clients a bird’s-eye view of what they are bidding on—be it a shipping port, factory, warehouse, retail location, or any other site.
  • Bank of America is using natural language processing to scan certain words—such as “cost cutting,” “asset sales,” and “cash burn”—used by executives in earnings call transcripts to predict the likelihood of companies defaulting on loans.

In addition to reducing regulatory risk, alternative data means are helping financial services firms become more efficient, provide a better customer experience, and provide products and services better tailored to their customers, explains Rav Hayer, who leads PwC’s Advanced Risk Compliance and Analytics practice for banking in the United Kingdom.

Data quality at the forefront

With new opportunities also comes new risks, as alternative datacentric business models must adhere to a variety of global laws and regulations in the areas of data privacy, anti-money laundering, cyber-security, and more. Therefore, numerous factors must be considered before leveraging alternative data models and new technologies, with data quality being first and foremost.

“Ultimately, as financial services institutions use data to drive decision-making, they must ensure their products are delivered without bias and provide responsible outcomes to their customers, which then leads to data ethics.”

Rav Hayer, U.K. FinTech Lead for Banking, PwC United Kingdom

“Data quality is the new gold,” Hayer says. It serves as the very foundation upon which all data analytics capabilities are built. For all the talk around alternative data means, none of it will bring any real value to the business if the data itself is wrong.

“So, getting data quality right is very important,” he says. What that requires in practice is the firm reviewing all the data in its possession, both structured and unstructured; assessing what data it does and does not need to be holding onto; and reevaluating the firm’s data collection practices overall.

Along with that, data quality plays a role in the overall integrity of data, driven by the culture of the organization. “Without these principles, institutions will struggle to comply with regulations and attest that their data is being used as intended,” Hayer says. “Ultimately, as financial services institutions use data to drive decision-making, they must ensure their products are delivered without bias and provide responsible outcomes to their customers, which then leads to data ethics.”

In this area, chief compliance officers can play a central role by ensuring the proper policies and procedures are in place to be able to verify data is complete, accurate, and auditable. CCOs need to be tech-savvy, understand how RegTech can fit into the organization’s business strategy, and be a partner to the business in solving widespread regulatory challenges, says Ben Richmond, founder and CEO of CUBE Global.

‘They won’t survive the next 10 years’

Beyond RegTech, making the shift to digital technologies will be a matter of survival for traditional brick-and-mortar banks, Hayer says. What we’re seeing now is the rise of so-called “challenger banks,” which are branchless, digital banks popping up everywhere. FinTech firm Chime based in the United States, Monzo, Starling Bank, Monese, Revolut in the United Kingdom, and N26 in Germany are just a handful of examples.

These challenger banks are posing competitive threats for traditional banks for a number of reasons: They’re more attuned in terms of understanding customers; their technology is modern, scalable, and cloud-based; and they’re better able to leverage alternative data means because they don’t have archaic legacy IT systems like a lot of traditional banks do, Hayer says. Unless traditional banks start to make these same investments in technology, “they won’t survive the next 10 years,” he says.

Looking at the bigger picture, Richmond compares the regulatory compliance environment of today to the 2008 financial crash, but on a much grander scale. Following the 2008 crash, regulatory frameworks increased exponentially. Fast forward to today, and now financial institutions are having to contend with a tsunami of new regulatory frameworks—data privacy, ESG, cyber-risk, and more—all amid diversification in the industry itself.

“It’s quite mind-boggling where we may end up on this journey of regulation and compliance,” he says.

Thus, the most successful financial firms of the future will be those that make regulatory compliance an integral part of the firm’s DNA, Richmond says, strategizing from the ground up how to build regulatory compliance into everything that they do in an automated way.