Agile and Compliant Banking and Lending: How to Achieve Both within an Era of Increasing Regulation
Earnix Team
March 23, 2023
- Pricing
- Governance and Compliance
Digitalization, inflation, evolving consumer behavior, and the aftereffects of COVID-19 pandemic have accelerated the pace of overall change in many areas of the financial industry, bringing various aspects of data governance and compliance to the spotlight. In an industry adversely affected by fraud, identity theft, and concerns regarding equitable lending practices. banks and financial organizations must now be even more transparent than ever before in the way they serve consumers. Simultaneously, consumers demand a faster, all-digital banking and lending experience. A successful future for banks and lenders depends, in large part, on resolving the tension between innovation and governance.
Without a doubt, technological and process innovation is the path forward for the industry. Balancing it with regulatory compliance and governance is not an easy task.
Regulatory compliance adds up to a massive burden, both in terms of time and money. The risk (and cost) of noncompliance is too big to ignore – $11 billion in fines worldwide for know your customer (KYC) and regulatory non-compliance at the end of 2021 – but so too is the threat of agile fintechs snapping at the heels of traditional banks and financial institutions.
In many cases, fintechs and new neobank/challenger banks already have the hearts (and wallets) of the up-and-coming “instant gratification” generation. Today, nearly 80% of Gen Z are already using mobile banking and have come to expect near-instant delivery of tailored products and services.
According to research conducted by J.D.Power, more evidence of online buying behavior is being shown. For example, 85% of buyers reported having visited a dealership during the purchase process, down from 88% in 2021, while 18% of buyers who visited the website of their dealer say they completed the purchase paperwork online, up from 13% the previous year.
Regulators are intensifying their scrutiny of fair lending practices, in a manner similar to the increasing attention being given to data and compliance regulations. On February 23, 2023, the Consumer Financial Protection Bureau (CFPB ) announced that it had issued orders to nine of the largest auto lenders requesting information about their auto lending portfolios. According to the CFPB, the nine targeted lenders represent a cross-section of the auto finance market and the data collected in response to these orders will help the CFPB build a data set that provides them with insight into lending channels and loan performance.
When pricing and underwriting consumer loans, banks will need to be agile, transparent and compliant.
The Need for Faster, More Personalized Banking and Lending Experiences
Digitalization of the banking industry began in the early 1990s with early adopters implementing online banking and payment options. Over the years, many more have joined their ranks, yet more is now expected and required. For example, banks and financial institutions must be able to provide digital, personalized banking and lending experiences at the speed consumers demand.
This topic has received much attention in the banking industry, but where there is less awareness is the area of governance and compliance and how technology can play a role. Today, many rely on manual processes or disparate legacy systems – an approach that makes it difficult to achieve compliance, especially with more demanding regulations. Yet there is some good news: the same technology that is already helping banks deliver better product offers, services, and customer experiences can also help them improve their compliance processes and results.
Data can be a Complement – and a Concern
In the new digital economy, data is gold. This is especially true if banks can use innovative new strategies and tactics to collect different types of data and derive meaningful new insights. Many banks and financial institutions are already doing this today by developing faster, highly personalized products and offers that help them meet customer demand and gain a competitive advantage.
At the same time, data can be a cause of concern, especially if the format or volume makes it difficult to secure and manage – critical for effective governance and compliance processes. The challenge is exacerbated by the sheer volume of data banks now have access to, whether they collect it themselves or receive it from many different data sources. As the volume increases, so too does the effort required to manage, monitor, and govern its use each and every day.
To stay compliant, banks and lenders must keep accurate records related to all their data sets: which ones were used, what changes were made, who worked on them, and when. Many traditional banks still use legacy systems as well as manual efforts for pricing modeling. All of this also makes governance and compliance much more difficult.
Banks and lenders must follow a lengthy and complex due diligence process at every stage in the product’s lifecycle to demonstrate that data used was clean, accurate, and correct. Failure to do so properly will leave them vulnerable to noncompliance scrutiny, potential issues such as penalties and fines, and even litigation.
Best-in-class technology solutions like Earnix can help. For example, Earnix includes a powerful governance tracking, reporting, auditing, and logging mechanism, which stores all data and logs all user actions. This way, if any users need to review any process or product development steps, they can review a detailed audit log and drill down to see business operations, security-related events, and non-functional reports. Earnix also includes detailed user access reports and makes them available out of the box.
Data Vulnerability Throughout the Banking Product Lifecycle
What Happens When Data and Models Aren’t Governed Properly?
When data is becoming ever more available, banks and lenders need to ensure that the technology they are using to automate processes and underwrite meets today’s regulatory requirements.
In an EY survey of 21 European banks, 52% of respondents consider the move to a data-led approach for compliance functions to be a high priority. In addition, they also ranked technology adoption as the top-ranked compliance function.
As the banking industry evolves, analytics-driven banking products are becoming increasingly popular, including the increased use of machine learning and AI to develop highly personalized products and offers.
Yet when it comes to compliance, it’s essential to demonstrate what data was used, in which modes, yet this is becoming more difficult for a wide variety of reasons:
Multiple tools: Banks use many different tools and platforms for different purposes. If they are not vigilant, it could be easy to be inconsistent with the data source used to build each model.
Too many cooks: Banks, especially large ones, have teams of data scientists and other departments involved in data-related processes. Data is passed between individuals and teams all the time. If each team is using a different data set or model, consistency is lost.
Dynamic circumstances: As market conditions and other factors change, data and the models that are based on them can quickly become outdated, especially if the data is not updated in real time.
Transfer of responsibility: When employees leave, their knowledge tends to go with them – especially if there is no system in place that monitors and tracks specifically how data is used.
The bottom line? With the huge amounts of data coming into a bank each day from multiple sources at a near-constant frequency, the challenge lies in making sure that every model that is built pulls data from the same source each time it's run. Without this consistency, the accuracy of the insights coming from these models will be questionable – and the same goes for the bank’s compliance record.
Solutions like Earnix can help in this area, too. Our modules are protected by access and permissions to control user activity and further protect the organization from potential compliance issues. The Earnix system also allows real-time approvals to enable users to deploy pricing and rating models but do so in a way that offers maximum control and traceability.
Regaining Control of Your Data
The best way to ensure compliance is to have full control over the data, resulting in full transparency and auditability across all data and models. Proper data governance should include powerful capabilities related to tracking, reporting, auditing, and logging where all user actions are recorded, audited, and stored. Ideally, such governance and compliance functionality should also include out-of-the-box user access reports to quickly see which employees have various permissions and roles.
Earnix helps here with full version control and model governance capabilities. For example, our versioning functionality allows users to create and control various product models, pricing scenarios, and other offers, and Earnix’s governance capabilities track and log all user actions, including data used. Everything that goes into pricing is included in the version, including the new rule itself.
The system does not allow users to delete this information for maximum security and protection of data in case it is ever needed for an audit or a review. If there are ever any questions, the system can deliver a back-end audit of all actions and can be drilled down by user, action type, and time period.
Once it’s clear where the data is coming from, it’s then possible to continuously retrain models using fresh data (from that same source), which is always being updated in real time. This real-time data makes it possible to monitor and simulate new scenarios as market changes happen – with no time lag. The insights garnered are then much more relevant and actionable, increasing the speed at which new products can be brought to market.
Handoffs are one of the biggest potential minefields. An all-too-common scenario occurs when companies develop a model in one system, test in another, optimize in a third, and pass it through multiple teams before sending it to IT for coding. By minimizing the number of handoffs to other personnel and/or systems throughout the modeling process, the risk of error is significantly reduced. The more automated and streamlined the process can be, the better and safer it is.
Automate Your Compliance
It’s predicted that by 2030, traditional financial institutions will potentially save up to $31 billion of their underwriting and collection system costs through AI technology implementations.
Not only that, introducing automation at every step of the product life cycle will also provide the control needed for a failsafe governance and compliance process:
Fewer human errors will lead to reduced costs
Reduction in manual processes and handoffs between programs and people will allow for fast operations while still maintaining oversight
Staff time will be freed up for monitoring and business analysis instead of fixing data errors
Faster speed to market means keeping up with and surpassing the competition
Full transparency is available to easily prove compliance with all regulations
Today, innovative, powerful banking technology (like Earnix) allows banks and other lenders to price effectively while not having to worry about data management challenges. Yet these solutions also go a long way to improving governance and compliance.
Employee access rights and permissions are a big part of government and compliance. Modern pricing systems also include access policy rights and access controls, which can be configured to grant the most appropriate access to data, models, and information systems. Access can be granted by user role and can define who can access, read-only, edit, deploy, and execute various components and models. All of these capabilities ensure that only the right people will have access and permissions to different parts of the system.
The Earnix advantage to lending
Lenders need to prepare for and adapt to the changing regulatory landscape, and finding the right tools and technology is essential to success. Earnix’s AI-driven solutions can help you price and underwrite loans while ensuring regulatory compliance and audit trail for the entire process. Here is what full transparency looks like:
Audit trail for every pricing rule and decision, generated automatically.
Quotes stored for compliance and analysis.
Every part of the process is documented, including built-in versioning and fallback capabilities.
Details for each action or component are recorded– who created it, actions taken, and when.
Decisions can be tracked back to the specific items that were used at the time of the decision – data, formulas, models and pricing strategies. These items can’t be deleted if they are in use, an existing rule or strategy.
Built-in user management capabilities will ensure that only the right people will have access and permissions to different parts of the product.
The Future of Compliant Banking and Lending
Banking and lending are evolving fast, driven by the need for data and analytics to be able to provide the products and services that customers demand. At the same, the volume of data that banks handle makes compliance trickier and more cumbersome than ever. The best way for banks to remain agile and compliant is through the use of automation throughout the product life cycle.
Just as technology has already opened doors to new products and services in the banking industry, technology is set to transform the way data is handled - helping banks and financial institutions stay compliant under increasingly high-pressure conditions.