Between $25 billion and $50 billion in potential efficiency gains can be realized through targeted enhancements in banks’ risk and compliance functions alone without compromising effectiveness, according to a report released by Nasdaq, which reviews the interconnected challenge of increasing complexity.
“Financial institutions are particularly exposed to the exponential growth in complexity across the global economy, from the evolution of technology paradigms to the expectation of real-time finance and the explosion of data. What’s more, regulators have put banks on the front line in the fight against financial crime and cyber-attacks,” said Nasdaq chair and CEO Adena Friedman, in a statement.
“The good news is that as both external complexity and internal complicatedness have grown, so have the solutions to help manage them. By leveraging modern technology and embracing a systems-based approach, we can unlock significant efficiencies and foster a more resilient and innovative ecosystem towards the dual goal of resilience and growth. At a time where the demand for long-term capital is exploding and political mandates are geared toward change, this report provides novel perspectives on how we can better tackle complexity without adding to the mounting body of complicatedness.”
Whereas complexity can be viewed as external factors beyond the control of individual organizations, complicatedness arises from how organizations respond, and the mechanisms created to adapt to that complexity. Nasdaq’s analysis suggests that by reducing complicatedness in processes across bank Risk & Compliance functions, significant resources can be released and deployed towards critical investment areas such as the digitization of the global economy, the modernization of our energy systems, and the need for next-generation power solutions to enable the artificial intelligence revolution.
According to the report: “In Risk & Compliance in banks alone, it is estimated that thoughtful and thorough use of systems can reduce the cost base by 10%-20%, and this would produce at least $25 billion to $50 billion in direct savings. However, given the reach of relevant activities like internal controls and monitoring across functions there are additional savings to be realized in other areas like Finance, Operations, and anywhere where there are manual or duplicative controls.
“Such savings create additional capacity for banks to invest and deploy resources in other capital-constrained areas. For example, savings of $25 billion to $50 billion in direct Risk & Compliance expenditure alone can generate up to $1 trillion annual lending capacity through additional capital deployed, assuming incremental earnings are retained to strengthen the capital base.”
In addition, the report finds that financial institutions are turning toward strategic technology partners that offer holistic best-in-class solutions to their biggest risk and compliance challenges as a means of addressing the exponential increase in complexity. Only 22% of industry professionals have a preference to build software solutions in house, indicating that industry recognizes the value of systems-based solutions from trusted partners.
“The most effective solutions will require a comprehensive recalibration of people, processes, and systems,” said Tal Cohen, president of Nasdaq, in a statement. “By shifting from lengthy manual processes to systems-based and people-led processes, human capital can be unlocked to focus on decision-making, risk management, oversight, analysis, and innovation. Getting this right can unlock significant value through efficiency gains. But that only tells part of the story. The transformative potential of AI [artificial intelligence] will redefine every industry – including the financial industry – in the years ahead.
“The very same solutions that sit at the core of the complicatedness challenge, will serve as the foundation for success in tomorrow’s AI-enabled world. As such, effectively addressing these issues today could protect and reinforce competitiveness well into the future.”