Don’t make risk and compliance the enemy of financial services innovation and reinvention

The financial services industry lives with a mixed blessing. On the one hand, it is at the heart of everything from economic health and growth to the daily reality of how consumers pay for housing, transportation or even a coffee on the go to start their day.

Because our world is powered by transactions, both consumers and businesses alike look to the financial services industry to constantly innovate. That’s the good part of the mixed blessing: the opportunity to improve and reinvent. 

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On the other hand, there is a constant challenge around juggling changes. In an era when financial institutions are more highly regulated than ever before, risk and compliance mandates add an entirely new level of complexity.

To avoid making risk and compliance the enemy of innovation, financial services companies are exploring what new technologies, such as cloud and cognitive computing, can do to help them realize their aspirations, while at the same time remaining compliant.

Disruptors at the gate

The disruption that Uber and Airbnb sprung on their respective industries is now descending upon banking. Born-in-the-cloud startups and retailers with lower marginal costs and more agility increasingly compete for a piece of the payments and core banking pie.

With that said, it is important to remember that companies already entrenched in the financial services industry have a distinct advantage: existing customer and partner relationships. This virtual Rolodex gives today’s incumbents an opportunity to be at the epicenter of the innovation ecosystem, orchestrating a broad range of best-in-class services that will benefit customers and lock out new competitors.

How AFS is innovating

That is part of what is driving AFS, a commercial lender whose clients include two-thirds of the top 25 U.S. banks. Anticipating significant growth, AFS enhanced its existing mainframe environment with a hybrid IBM Cloud solution. Moving to a pay-per-usage operating platform resulted in a 2X-runtime improvement for many of the company’s core applications. This enabled AFS to exceed its service-level agreements with customers and protect its ecosystem from would-be disruptors.

This aligns with a Cloud Security Alliance financial services survey, which found that the top reason for companies to move to the cloud is flexible infrastructure capacity (68 percent), followed closely by the need for reduced time for provisioning (63 percent).

The realities of cyber risk and regulatory compliance

Harnessing technology such as hybrid cloud computing—the ability to store data both on premise and in the private or public cloud, using multiple cloud vendors—gives the financial services industry greater cost-efficiencies and an on-ramp for embracing evolving trends such as cognitive banking. It also helps organizations deal with the daunting realities of cyber threats and regulatory compliance, while at the same time maintaining the ability to innovate.

Financial services firms are hit with security incidents 300 percent more frequently than other industries. For a firm like AFS, the move to a hybrid cloud environment was achievable only if the platform met stringent requirements for data encryption.

In addition to cyber attacks, the other major focus for risk management is on business and regulatory compliance. While the financial services industry is highly regulated, the good news is that in the wake of Sarbanes-Oxley, it is benefiting from new technologies such as hybrid cloud computing.

One example of a regulatory body that must be kept in mind when making technology decisions is the Federal Financial Institutions Examination Council (FFIEC). The Council is an interagency body that prescribes principles and standards that guide the federal examination of financial institutions by organizations, including the Federal Deposit Insurance Corporation (FDIC). No financial institution can ignore the FFIEC’s strictures. AFS, for example, had to make sure the cloud solution it chose would meet FFIEC requirements for reporting and audit trails and for keeping all data within the U.S.

Regulatory compliance and managing cyber risk do not need to be the enemy of innovation. Taking a risk-avoidant approach to experimenting with new business models or user experiences will be a fast path to obscurity in today’s new landscape, where innovation and competition can come from anywhere.

Instead, banks and other players in the ecosystem should seek out technologies, such as hybrid and cognitive computing, that meet compliance and security needs but also enable agility and flexibility. If AFS’ experience is any indication, the end result will be expanded client portfolios, the ability to onboard new clients into production faster than ever before, and the doubling of processing capacity. In short, the kind of business results that drive growth and fund future innovation.