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Highlights
- Regulatory compliance at banks is ridden with challenges given the lack of real-time monitoring, disconnected data systems, and poor interoperability.
- Banks can overcome these obstacles by having the metaverse operate on top of existing compliance systems, as the primary interface.
- Over the next 18-24 months, banks should run compliance operation pilots in the metaverse for smaller business units (for instance the retail banking division of a large investment bank) within their organizations, to evaluate its potential.
In this article
Abstract
Banks and financial institutions have started experimenting with the metaverse across functions.
They are exploring its use in areas such as customer experience and relationship management, and bill payments. Another area where the metaverse can make an impact is regulatory compliance. Banks face compliance challenges due to the absence of a real-time monitoring system, siloed data systems and processes, and lack of interoperability between data systems. Leveraging the metaverse as the front end for regulatory processes sitting on top of existing regulatory compliance systems can help overcome these hurdles. We dwell on the challenges faced by banks in achieving compliance, touchpoints where the metaverse can be leveraged, and its potential business benefits.
Compliance is tricky
Banks and financial institutions juggle various priorities to ensure business as usual and deliver seamless customer service.
They need to focus on digital transformation programs, compete with fintechs, innovate continuously, and deliver superior customer experience, all while ensuring timely compliance with a plethora of regulations. Compliance obligations often overwhelm banks and financial institutions given that the industry is a highly regulated one.
Over the last decade, banks have leveraged several technologies and automation tools such as Tosca and Selenium, robotic process automation (RPA), artificial intelligence (AI), machine learning (ML), and deep learning to achieve compliance. Despite this, constraints around data—ownership, traceability, sufficiency, availability, and unified taxonomy—as well as accurate reporting still remain.
These challenges can be attributed to the lack of a real-time monitoring system, siloed data systems and processes, and absence of interoperability between data systems. Banks, therefore, grapple with multiple data issues and spend significant time and effort validating and reconciling data in regulatory reports with their sources. All this often results in non-compliance, and the cost of non-compliance is steep—stringent monetary penalties, loss of reputation and customer confidence, and the potential for legal action. In addition, inaccurate reporting—omissions, incorrect interpretations, and so on—can often result in regulatory actions such as strictures and observations or criticisms in the form of matters requiring attention (MRA) and matters requiring immediate attention (MRIA).
Finally, there is the matter of cost to comply—banks have invested heavily in compliance programs across manpower, technology, internal oversight, and IT infrastructure. New regulations, the need for enhanced disclosures, and data complexity, which demands a significant remediation and reconciliation effort, continuously elevate compliance costs. Rising costs adversely affect market capitalization, making it difficult for CFOs to control volatility. Optimizing compliance costs and the effort involved and maximizing value from investments are, therefore, key imperatives.
In our view, these challenges can be overcome by establishing a real-time monitoring system for the compliance function. The way forward for banks is to explore the use of the metaverse to enable real-time monitoring and control of compliance processes. The metaverse can act as the front-end for regulatory processes by sitting on top of existing regulatory compliance systems.
Enter the metaverse
To improve regulatory compliance, banks and financial institutions must explore the metaverse.
In the existing process, there is a time lag between the occurrence of issues and their rectification and reconciliation. Consequently, banks employ large teams to reconcile the backlog of issues. In the metaverse, however, avatars of data stewards and business stakeholders will be available on demand and in real time so that issues around data ownership, availability, traceability, and taxonomy are resolved as they occur. This means there is no backlog of transactions or events to be reconciled, which not only reduces the need for remediation and reconciliation but also cuts associated costs.
In addition, regulators too can don an avatar and become part of the metaverse to proactively identify and rectify errors in regulatory submissions. Moving to the metaverse, where banks’ business users and regulators don avatars in an immersive shared experience mode, will bring a host of benefits. It will infuse agility into compliance processes, improve data quality, enhance fraud prevention (through real-time monitoring), and lower remediation and reconciliation costs, translating into significant savings.
While the metaverse will entail substantial investments, the benefits make it worthwhile. We discuss three key advantages in detail below:
A unified business data fabric
While the responsibility for regulatory compliance rests squarely on the CFO’s office, achieving timely compliance demands inputs from other business units, including the CRO and the CIO functions of the bank. By leveraging the power of meta-infused immersive learning, banks can build a robust business layer that encompasses a standardized, flexible, and unified business data fabric, which will also enable data interoperability. Extended reality (XR) will facilitate seamless collaboration between all the functions, finalize the data dictionary and taxonomy in real time, and relay business projections and what-if scenarios to the regulatory reporting function. Leveraging the metaverse will also enable on-demand data availability and help reporting teams devise focused data repositories using data mesh technologies, in turn, enabling users to access data needed for regulatory reporting and compliance.
Reporting lineage and data aggregation
Data aggregation and data lineage (extensible from regulations like BCBS239) are an essential part of a compliance program. Lineage entails ensuring an exhaustive, end-to-end trail of all aspects in the report lifecycle. It involves data traceability, starting from origination in source systems through different data transformation hops in the path, and finally, mapping to a report field or parameter. It also includes processes and all the events that are auditable, verifiable, and corroborated by a system-centric trail. Finally, it includes approvals along the report formulation exercise and workflows and those triggered, effected, and corroborated by IT system-level evidence. The metaverse, along with XR devices, will help businesses ensure reporting lineage in that the technology will facilitate a complete exhaustive traceability of events, actions, and data to enable a holistic view of reporting.
Optimized compliance costs
The metaverse will ensure on-demand data availability, enabling banks to maintain leaner data and technology systems (servers, hardware, storage and so on), which will translate into lower costs by reducing IT spends. Furthermore, lean data systems will result in standardization of applications, reduced use of end-user compute (EUC) systems, and effective data traceability—all of which will help lower costs.
Faster, smarter reporting
Embracing the metaverse will enable banks’ business units and functions to become decentralized entities.
This will allow them to have intrinsic control over their unit or function, business data, controls, hierarchies, workflows, risk metrics, finance entry adjustments and so on. Thus, each business unit or function in the metaverse will be empowered to address intra-unit business dependencies in real time and drive timely decision-making. Decentralization will help alleviate inter-entity reconciliation, where accounting entries can be reconciled and struck off banks’ books with limited human intervention in near-automated fashion. In normal circumstances, banks spend days on reconciling inter-bank and inter-entity entries and nullifying suspense accounts where transactions pending reconciliation are typically parked. While performing inter-company or inter-divisional reconciliation, accounting rules must be applied and relevant adjustments or rectifications made. The metaverse will bring in two significant changes: first, each department, business unit, and entity will mimic a self-contained unit with complete control over accounting and business transactions. Second, the metaverse will allow banks to build a central rules engine for complete end-to-end traceability. These changes will lead to faster inter-company reconciliation and daily closure of accounts, in turn, resulting in timely report submissions.
The way forward
Banks must consider running pilots across different areas in the compliance space.
Embracing the metaverse may necessitate running pilots for small business units within the bank over an 18-24-month horizon. For instance, the weekly FR2900 report covers daily outstanding balances across different deposit types and cash-at-vault.
Stakeholders such as cash and deposit system owners, regulator(s), report preparers, and reconciliation specialists can be part of a shared metaverse ecosystem. Such a platform will offer economies of scale as the data, avatars, and output reports will be part of one self-sufficient ecosystem. Finally, the regulator’s avatar can review reports, perform scenario analysis, and decipher stress testing outcomes in real time. Which, in turn, will eliminate the need for secure submission systems such as the Direct2Australian Prudential Regulation Authority (D2A), Electronic Data Gathering, Analysis, and Retrieval (EDGAR), and the US Securities and Exchange Commission and so on.
Adopting the metaverse to improve regulatory compliance will require banks to focus on some important aspects, such as:
- Balance sheet management must continue to be governed by the CFO’s office. However, individual business units and divisions can operate as self-contained sub-entities.
- Autonomous business units must not inadvertently contribute to systemic risks.
- Given that data will reside in the virtual world, ensuring adherence with local data and privacy laws must be top of mind.
- Non-financial risks, such as legal and operational risks, that embracing the metaverse may expose banks to, should be evaluated and appropriate risk mitigation measures must be put in place.
- Exhaustive review of the arbitration, dispute management, and adjudication mechanisms in the legacy contracts must be performed. Appropriate amendments to arbitration and other dispute management mechanisms may be necessary to align with the metaverse.
- Adherence with the principles of fair use applicable to the adoption of artificial intelligence (AI) in different jurisdictions and explainability of AI must be considered.
In summary, we believe that banks must consider running pilots across different areas in the compliance space. Based on the results of these pilots, the metaverse has the potential to enrich the regtech landscape and can form the basis for wider adoption in the banking industry. Banks must also collaborate with regulators to explore the possibility of industry-wide adoption through a consortium model.
