Secure Marketspace with Mike D'Agostino

Predicting the Next Regulatory Challenge for Financial Institutions

Wow - we've been part of quite a bit of quick decision-making recently. Financial institutions going out of business almost overnight, trillions of dollars being offered from the U.S. government in the blink of an eye, and the largest in the industry merging with and/or acquiring peer institutions within weeks. I can understand that possibly the U.S. economy and financial markets have been headed in this direction, or at least signs were pointing in this direction. However some of the now commonplace decisions and commitments made in the last two quarters have been comparable to, say, a special effects summer blockbuster movie.

When you think about just the decision-making process, though, you inevitably have to look at the timing of those decisions. Think about for a moment how one might respond to real physical danger. I'm talking about a situation where your actual life might be in jeopardy. During such a time period, every single move and thought becomes vital. Each decision can have a definitive impact on surviving. Wouldn't it be nice, though, during such an event, to be able to sit back for awhile, survey the area, perhaps do some research and inquire with a few experts how you might have the best chance to escape unharmed? Unfortunately, such activities are only possible when one is relaxed in their environment.

Put this in terms of regulatory issues that face financial institutions. There is absolutely no doubt that technology available and being utilized by financial institutions is becoming more and more varied and novel. The gap between financial institutions that are not technology-centric at all, compared to the most tech-centric institutions, is enormous. How do the regulatory agencies dictate rules and directions to not only cover all types of institutions utilizing technology on a considerable varying degree - AND account for the ever-expanding technology options?

So we can see a few key changes happening very quickly in the banking industry:

Technology is advancing very rapidly;
The number of institutions utilizing cutting-edge technologies is expanding;
The number of people utilizing online and mobile (person-not-present) banking is expanding.

I believe the banking industry and regulators are already in "bailout mode." This is where, as stated above, one is forced to make quick/reactive decisions to ensure survival. And while I don't think there is a feeling that "banking is broken," customer trust is absolutely paramount right now. And I think that trust is being focused more and more on automated, technology-based activities. Such as making sure that when someone is accessing their online bank account, that no one is stealing their password or something else dubious. This is a bit different than 25 years ago, when the trust was more about the face of the person you were handing physical cash to. Nowadays people may never go to their branch or see one person associated with their bank, however they know the bank's website like the back of their hand. And so it should become clear that, moving forward, trust will be about ensuring the customer's investments, data, and identity are protected - when they are not physically present.

And again, I feel like regulatory agencies are playing catch-up at this point. The authentication guidance was good, and definitely seems like a minimum standard two years later, but it's not enough. I don't think the banking industry is where the automotive industry is quite yet, but is headed in that direction. In the automotive industry it seems absolutely clear that people, consumers, do not want gasoline and do not want to be dependent on anyone for fuel. The U.S. automotive industry (I would argue worldwide), has significant changes to make in the coming years. I'm saying fundamental changes, as in every single car developed that runs on gasoline would hopefully become obsolete in somewhat of a short time. Just to throw the term in one more time...the automotive industry is versioning into "2.0".

Will the same thing happen in the banking industry? Is the same thing already happening? Are the regulatory agencies merely responding at this point, as opposed to predicting and guiding? Do you foresee them responding more and more quickly in the short term?

I think so. I think we are already a ways down that path. Much of "banking" is no longer about handing physical cash or a check to a teller and saying high to the branch manager on the way out. Banking is now about gaining access to and utilizing your finances whenever, wherever you want - with confidence that said access would be as secure as if dealing with a real person face-to-face.

I haven't talked with anyone that says more regulatory oversight is not needed in the banking industry. In fact a majority of our audience agrees, according to a recent banking confidence survey we administered. And so to predict the next regulatory challenge is like saying that financial institutions need to be prepared to act quickly and adjust. I think we will see new guidelines being issued for some time, again in response to things that are already happening. This might mean more regulations related to online or non-present banking. Mobile banking and in general wireless data transmission seems like a technology target for criminals. And ensuring someone's identity seems paramount. I cannot foresee any of these things, though, acting as a silver bullet to combat overall fraud and ultimately a loss of money for individuals or institutions.

Instead, I think we see attacks getting worse. The size, scope, severity, and impact of technology-based fraud will continue to grow. Ultimately I think at some point banking may in fact become "broken," where that fundamental consumer trust is gone.

So for now, the next regulatory issue facing financial institutions will be one where the institution is forced to change their current program and adapt very quickly. This might mean one issue for one institution and a different issue for another. I believe it's inevitable, though, that we will see in the next 3-10 years a change so fundamental to banking that we will be looking back to the 1900's and laughing about the "old days."

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