Compliance spend may take toll on fintechs
Lenders have had to spend unprecedented funds on compliance in the first quarter, which could shift resource allocation at banks and credit unions and hamper post-pandemic fintech partnerships.
“We’re expecting to see [the Banking Compliance Index] be up above 2 in a first quarter for the first time ever, and that’s directly related to the pandemic,” said Pam Perdue, executive vice president and chief regulatory officer at reg tech provider Continuity, during a live webinar hosted by INV Fintech and Bank Innovation today. The quarterly index measures the cost burden on FIs to keep up with regulatory changes; Perdue noted the figures are based on a statistically average $400 million institution.
That increase translates to the equivalent of two full-time employees in a $400 million bank or credit union working just to manage regulatory change. There are more than 15,200 unique regulatory requirements for banks and credit unions, and they change more than 200 times a year, according to Continuity’s website.
Watch the full webinar below, featuring Rodrigo Suarez, principal at INV Fintech, and Pam Perdue, executive vice president and chief regulatory officer of Continuity.
New Haven, Conn.-based Continuity provides regulatory technology to automate risk and compliance management for the financial services industry. Perdue’s financial and regulatory experience includes serving at the Federal Reserve Bank of Kansas City and several financial institutions, ranging from de novo to regional and global scale.
The first quarter is typically the “quietest” when it comes to the BCI. In comparison, Perdue said Continuity saw “somewhat staggering numbers” in the fourth quarter of 2019, when the BCI was 1.79. While Continuity has yet to publish the BCI for the first quarter, the company’s analysis shows that there will likely be double- and triple-digit year-over-year increases in costs and time spent on keeping up with compliance requirements.
“You know when people say, ‘Why don’t our bankers have anything to spend on our software?’ Well you can see that a typical [$400 million] financial institution spent almost $47,000 of its money just complying with the regulatory environment in the fourth quarter of last year,” Perdue said.
The increased spend on compliance is likely to draw attention and dollars away from “lower risk matters,” Perdue said. However, security technology and marketing dollars are likely insulated from the drawdown of funds, as banks are reportedly dedicating more to these initiatives, she said. Lenders are also in search of more liquidity by attracting deposits, which could mean more resources allocated to marketing technology and deposit aggregators.
The pandemic has not prompted banks to take on emerging technologies, like blockchain or machine learning, Perdue said, and community banks may even pull back from emerging fintech.
As fintechs join the race to pivot product design and address the rapidly changing economic environment, regulators will likely keep a close eye on third- and fourth-party due diligence. Regulators are likely to “force that a bank or credit union really engage a very strong due diligence process up front before teaming up with a provider,” Perdue said.
That’s bad news for fintechs, she added. “We thought that bank-buying cycles were bad before, in the aftermath of the [pandemic] they’ll get worse.”
