Launching a new consumer and commercial bank involves numerous complexities and is a very costly venture. Ignoring compliance comes with a heavy price.
According to Consilient, these banks operate within a mostly ‘free’ banking environment, relying on non-fee or low-fee models, which presents its own set of challenges. They must develop robust systems, meet strict capital requirements, ensure regulatory compliance, manage risk, and create compelling product offerings to attract and retain customers.
The venture of established players like Goldman Sachs into consumer banking showcases the potential pitfalls. Despite their extensive resources, Goldman Sachs experienced losses over $3 billion within three years due to a rapid expansion strategy and a lack of customer insight.
David Solomon, CEO of Goldman Sachs, reflected on the experience, admitting the bank attempted to achieve too much too quickly.
Starling Bank, which quickly grew to 3.16 million customers by 2023, faced significant scrutiny over its AML systems. The Financial Conduct Authority (FCA) criticised the bank for ‘shockingly lax’ financial sanction screening controls. Therese Chambers, FCA’s Joint Executive Director of Enforcement and Market Oversight, commented on the deficiencies, noting Starling’s failure to meet agreed regulatory requirements, thus heightening the risk of facilitating financial crimes.
The FCA’s findings on Starling Bank highlighted several key issues:
Recruitment Challenges: The bank struggled with hiring and retaining skilled personnel.
Ineffective Systems: There was a clear failure in setting up robust risk management and control systems.
Lack of Oversight: Accountability and oversight were insufficient across various operational levels.
Underfunded Compliance Efforts: The financial crime unit lacked adequate resources, both in terms of personnel and technology.
Poor Data Management: The bank did not effectively utilise management information to inform decision-making.
Leadership Issues: There was a significant gap in leadership regarding the prioritisation of financial crime prevention.
In response to these challenges, the FCA released guidance in April 2022 for new and challenger banks, emphasizing the need for scalable financial crime controls that adapt as the bank grows. This includes ongoing investment in systems and a consistent approach to managing alerts to prevent overlooking potential risks.
Challenger banks can overcome these hurdles by adopting a strategic approach:
Banks should allocate adequate resources to developing systems that effectively prevent financial crimes.
Utilising AI and machine learning, such as Federated Learning, can help in identifying suspicious activities more accurately and efficiently.
Reducing false positives and managing alerts efficiently can prevent resource drain and focus efforts on genuine threats.
For challenger banks, redefining financial crime compliance involves thinking creatively and deploying resources effectively. By integrating advanced technologies and fostering a culture that prioritises compliance, these banks can not only meet regulatory demands but also set new standards for the banking industry.
Copyright © 2024 RegTech Analyst
Copyright © 2018 RegTech Analyst
