We all need banks – irrespective of whether we have less money, some or a lot of money. Without banks, a lot of money-related activities would not be possible. Because of this reason, banking is a heavily regulated business industry, with stringent requirements and a list of protocols that need to be followed to maintain the liquidity of funds, financial reporting, cybersecurity, continuity and perpetuity of business operations and so much more.
As you can understand, the banking system has to manage a plethora of services and operations to provide to the end consumers – bank customers. This requires the management of compliance which can be quite challenging, as failing to comply could potentially lead to monetary penalties, operating restrictions, bad reputation, and even lawsuits!
To serve customers better and stay afloat in this sector industry, banks are required to conduct regular compliance risk assessments to identify, review, evaluate, and subsequently mitigate the creeping risks.
Compliance management comes from compliance risk – which essentially refers to the risk of legal or regulatory action, financial loss, and the risk of a tarnished reputation that could arise if a bank fails to comply with laws, regulations, and standards set by the industry. A few examples include risks related to anti-money laundering (AML), know-your-customer requirements (KYC), customer protection, etc.
How do banks manage such compliance risks? It takes stringent action and implementation of policies and procedures to ensure that they comply with these. Banks also manage compliance risk by ensuring regular monitoring and testing to check and address any additional compliance issues.
You see, a bank is considered ‘good’ if it has a well-developed compliance management system – complete with an effective risk control system. The bank must establish and communicate the compliance framework to employees, the BOD, and the senior management. By following protocol via the grapevine, a bank can successfully improve the effectiveness of compliance management programs.
Operations management in the banking system refers to a preventive discipline framework that proactively monitors, manages, and controls the risks faced by banks. ORM (Operational Risk Management) involves processes like evaluation of the bank’s risk profile and level, mitigation strategies for such risks, and risk-adjusted capital requisites.
It also includes tools that might improve the monitoring processes, and help the bank identify the most significant risks – before things get too late.
Thus, operations management consists of an intricate framework of risk management processes, procedures, etc. that are meant to focus on the compliance, financial, and reputational risks related to the bank’s operations.
The framework involves major elements like risk assessment, risk management policies, monitoring of risks, communicating the risk, governing and administering these risks, and finally risk elimination.
This of course goes without saying that no two banks follow this exact hierarchy – as they each have their assessment framework but the gist remains more or less the same for all.
With recent changes, innovations, and advances in the banking industry, it is important to maintain harmony with both compliance and operations management on one side and also gear up to prepare and accept new changes, advancements, and innovations on the other side.
In the digital and tech age, customers expect their banks to keep up with the new trends to get a more personalized experience. Younger generations want better, faster services whilst knowing that their personal information remains personal. Banks use insights from customer behavior and preferences which help create customized products, and services designed to meet the customers’ wants and needs.
Banks have to stay afloat by managing innovation whilst also improving risk management, fraud detection, and regulatory compliance simultaneously.
It is a no-brainer that banks have to ultimately shift from a traditional mindset and embrace new approaches to create a data-driven culture, which requires capital investment in new technologies, better infrastructure, and of course, a hunger for committing to experimentation.
To keep up with innovation, banks must foster a new-found culture wherein employees are encouraged to experiment with cutting-edge ideas and approaches and of course, learn from their failures.
In the delicate balance between compliance and innovation, banks have to maintain harmony. They have to adopt a risk-based approach, and they need to focus on the most significant risks that are affecting the industry, and subsequently prioritize the compliance efforts accordingly.
In simple words, banks have to invest in newer technologies and data infrastructure to help comply with regulations more efficiently.
The banking industry is walking on a tightrope – advances in technology, constant innovation, and cut-throat competition have created new opportunities but at the same time, banks must maintain compliance risk management at all times which poses a challenge for banks to strike an equitable balance between both sides.
The industry needs to be efficient, reliable, and modern all at the same time – if it wants to remain competitive with a good reputation in the market. Thus, banks have to strive to create a favorable and desirable environment by being efficient, reliable, and customer-centric; this can be attained by adopting a risk-based compliance approach, investing in technologies, and constantly staying updated.
