â€śThe making of laws is like the making of sausages â€“ the less you know about the process, the more you respect the result.â€ť
That old truism is a particularly unsavory one for the banking industry, which has little taste for regulatory sausage in any form. Besides the fact that links made in Congress can be costly and hard to swallow, every time a new regulatory sausage is produced, financial institutions must find a way to incorporate it into their business processes to maintain compliance. And like making sausages, the process of adapting banking systems to ensure compliance can be messy and unappealing. New errors, greater inefficiency, and increased complexity can be introduced every time a new regulation is incorporated.
Clearly, as banks grow and adapt to changing market conditions, they need infrastructures and banking processes that are adaptable enough to grow and scale with them. Any banking system has to be able to quickly and easily support the institution’s strategic objectives, such as introducing new products, entering new markets, merging functionality, measuring performance, and so on. These are all contingencies that can be planned for and built into systems and processes.
But compliance is different. It defies even the best-laid plans, because banks must not only account for the existing myriad of laws and regulations, but also any number of future, as-yet-unknown regulatory changes. So even banks with the best automated, scalable processes can be caught flatfooted. The result could well be a room full of expensive lawyers individually reviewing and approving every bank loan to ensure compliance with the new Dodd-Frank consumer protection law â€“ and worse, having to manually re-enter the data every time.
But wait â€“ aren’t banking software vendors working around the clock to deliver upgrades that support new compliance requirements? Sure they are â€“ but the problem is that most banks’ systems are a mix of different vendors’ solutions stitched together with significant customization. So even if a vendor’s upgrade is “compliant,” it will likely require further costly customization to implement. As this happens, many smaller banks may fall prey to an unsupportable â€śefficiency ratioâ€ť â€“ the point at which the cost to generate each new dollar in revenue becomes too high to stay in the black. The solution is to put in place a banking infrastructure and process that can accommodate even unplanned-for change â€“ and stay at least one step ahead of the sausage-makers.
In Part II, we’ll take a closer look at what that banking infrastructure and process should look like.
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