In the era of strict regulation, digitalization can become a magic wand for banks

Many problems have emerged in the banking and fintech sectors in recent years due to the increasing complexity of financial crimes. This resulted in fines for defaultand the value of anti-money laundering violations doubled, reflecting the severity of the regulatory response. The main problems in 2023 they did not report suspicious activity, lacked adequate customer verification and did not comply with sanctions.

Furthermore, given the rapid pace of digitalisation processes, difficulties in introducing technologies and the lack of updated systems have made the problems mentioned above more serious. Why is the banking sector, generally considered well developed, facing these problems and how can they be solved? Let’s delve deeper into this aspect.

The banking sector is struggling to adapt to the era of digitalisation

The rise of digitalisation has rapidly transformed our world, impacting every aspect of daily life. The global banking system is no exception, with the penetration rate of digital technologies in banks increasing every year. Also, emergence and growth influence of neobanks intensify competition within the sector.

As banks compete for market share, the adoption of digital technologies has become critical to remaining competitive and meeting evolving consumer expectations and needs. The integration of digital platforms allows banks to offer personalized and easy-to-use services, simplify operations and improve accessibility to customers.

However, many banks, especially in the European Union, continue to rely on it obsolete infrastructure and operational software, posing significant challenges to their digital transformation efforts. On the one hand, the transition to modern digital systems is relatively expensive for some banks, especially smaller ones, due to the significant initial investments required for new technologies, infrastructure and employee training.

Larger institutions, on the other hand, often find themselves deeply rooted in existing systems and software, making migration a daunting prospect. The process is expensive and time-consuming and could take years to complete.

Additionally, a successful transition requires retraining your entire staff to ensure they can use the new solutions effectively. This scenario highlights the complex barriers that financial institutions encounter on their path to digital modernization.

Regulatory control adds another layer of complexity

It is important to note that remaining compliant with regulatory standards is critical as the financial industry evolves. The banking and fintech sectors are increasingly subject continued regulatory pressureforcing banks to expand their compliance departments.

Even larger entities struggle to meet regulatory requirements, let alone smaller ones. Smaller institutions, in particular, need help embracing the evolving regulatory landscape.

Due to ongoing regulatory pressure, financial institutions must continually expand their compliance departments to keep pace and avoid fines from regulators. However, resources are limited and banks consistently have trouble recruiting additional high-salaried compliance officers.

Furthermore, regulators require that every final compliance decision be overseen by a human employee, thus preventing the full automation of the compliance process and making the problem of adopting digital technologies more severe. This requirement adds an additional layer of complexity to banks’ operational capacity.

How to overcome these problems?

To align with digitalization processes, modern cloud solutions can significantly reduce the time and costs associated with digital transformation for banks. These innovative technologies offer scalability, flexibility and greater security, helping financial institutions streamline their operations and improve efficiency at reduced costs.

Furthermore, competitive pressure from neobanks is pushing traditional banks to initiate upgrades and move towards more efficient solutions. As neobanks offer cutting-edge technologies, traditional institutions increasingly find it necessary to embrace digital transformation to remain competitive.

Digital transformation in the banking sector is already well underway and, in a matter of a few years, it will be difficult for institutions to survive without undergoing such critical transformations. Therefore, it is important not to resist the flow of change but to exploit it by implementing technology.

In addition to maintaining competitiveness, digitalization can help promote compliance and meet regulatory requirements. For example, integrating artificial intelligence (AI) and automation into compliance processes represents a critical advance in solving AML compliance challenges. Artificial intelligence is faster than a human; can check the rules and adapt processes to them more precisely and effectively than a real person.

Artificial intelligence has the potential to completely transform risk management practices AI-powered risk intelligence centers. These centers could provide automated reporting, improved risk visibility, improved decision-making, etc., to align with changing regulatory requirements. Furthermore, AI is impartial to humans and sticks only to hard facts. With this ability, it can simply highlight where processes meet requirements and where they need to be improved.

These technological innovations are already available on the market and have the potential to substantially reduce the need for large numbers of compliance officers by automating routine oversight and control tasks. While their number may be reduced, their importance is expected to evolve, shifting their focus from overseeing all procedures to moderating decisions made by AI systems.

• Roman Eloshvili, founder and CEO of XData Group, a B2B software development company. Mr. Eloshvili is a visionary serial entrepreneur with a keen eye on Internet banking trends and opportunities. As the founder and CEO of XData Group, Europe’s leading B2B software development company, he is deeply invested in the advancement of Internet banking across the region. In his capacity, Eloshvili leads the development of artificial intelligence in the banking sector in response to market demand, while also overseeing all financial aspects of the Group.

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