AMLComplianceFinancial IndustryMoney Laundering

The Case For a Networked Franchise Model in the Compliance Industry.

Financial industry franchise

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In all industries operating globally, there are head and tail winds that impact the strategic moves of the incumbent businesses. The compliance industry is no different.

The financial industry as a whole has a few problems to solve.

This first chart details the rise in AI/Machine Learning provision across the FI.

47% of FI’s are currently using it in one form or another and 37% say they will be doing inside five years. This survey was taken three years ago so it is likely many of the 37% have already adopted.

Banks, in the main, are adopting this technology to reduce the huge human resource burden they have. This will include reducing external consulting as they all look to reduce costs – especially the small FI’s with assets less than $10B because they spend disproportionately more on compliance.

The FIs with assets less than $10B are the target market for small compliance consultancies, this group are more motivated than the larger FIs to reduce costs, and that means the loss of jobs. The smaller FIs, circled in red, are the bread and butter organisations of SME compliance consultancies the US over. As the larger FIs adopt machine learning technologies, they will pave the way by reducing the risk of the smaller FIs to adopt it – having done the risk related testing of the tech.

Economic

The global cost of Compliance relating to AML and CTF is $181 billion per annum.

  • APAC: $6.1B
  • EMEA: $138.8B
  • LATAM: $4.5B
  • U.S. and Canada: $31.5B

The cost is borne across every institute no matter the sector. From Banks to Insurance to Private Wealth management – no one escapes cost. It is divided into two broad areas, human resource and technology.

Within that paragraph lies the main reason a network to support the industry (and DNFP&Bs) is the route to maintain a compliance industry consultative base. The cost of human resource has exploded in compliance as the risk for not adhering to the rules has become significantly expensive economically and to reputation.

Yet the industry has ‘thrown’ human resource at the problem and that resource is not performing. The fines keep coming and the return on that investment is negative with reducing productivity, increasing costs on lines of business and reducing customer satisfactions – caused by delays.

Loss of productivity due to AML compliance…
Volume of staff directly employed by the FIs.
Customer attrition.

Customers most impacted are the most valuable to banks – the wealthy. Necessary increases in the volume of checks is causing delays to on-boarding and attrition in the sign up process. This impedes the very business of banking – moving money quickly.

By inference, it isn’t just the cost of compliance but the negative impact on the bottom line that frustrates and occupies the C-suite.

The fines keep coming and damage to reputation grows. This is because the legacy tech used within the industry isn’t good enough and human resource thrown at the problem cannot keep up with the evolving nature of crime and the speed of the issues.

But it is getting better as machine learning systems speeds up due diligence and makes it more accurate. Also reducing the false positive rates of monitoring checks.

For the small compliance consultancy this is a dangerous period. Unprecedented growth over the past ten years has seen small consultancies spring up across the globe, most notably in the US. They serve a market of risk, writing reports and completing audits of everything from process to training and beyond- but this is set to change as banks and institutes move to digital solutions making consultants redundant.

Andy Parr – Founder CYW Solutions.

The tech improves the speed of checks and makes them more effective so the banks are pursuing a strategy of IT to reduce human cost. The first to be damaged by these changes will be small consultancies.

Whether it is IT managing the screening/risk rating of customers or the online portals to train their staff, compliance is going digital.

Technological

It is mind boggling the volume of regtech start ups. The volume of investment in this sector is burgeoning at an ever greater pace and this identifies the trend to go digital.

The trend line can be seen to be increasing as wealth pours in to this sector. It is doing so because the Financial Industry is being impacted with large regulatory punishments and collectively all businesses are looking for solutions.

There is a realization that this cannot be solved with human resource. That the resolution has to be IT related. Humans simply cannot keep up with the criminals, neither can the regulators but that’s another story. The real story behind this chart should cause compliance professionals to consider;

“Where will I be and what will my job be in 5 year’s time?”

Here at CYW Solutions we predict that small to medium compliance consultancies are at the peak of the market right now. Their client base from the Financial Industry is set to tail off as the strategy moves from human to technological answer.

Political

The political sphere of control extends beyond Nations to pseudo organisations like FATF. As the recommendations become more ‘regulatory’ in nature – moving to requiring an ‘outcome’ and not just a recommendation, it can be seen the industry and associated regulators are moving to not just require laws and policies to be implemented but actually used. An example of this can be seen in the Cayman Islands and its last mutual assessment by CFATF.

“It’s OK putting in place laws, but when no one is prosecuted it kind of makes them toothless. There is a dire need for FATF and it’s associate bodies to drive the ‘Outcome’ agenda now – forcing jurisdictions to not just implement and then leave to gather dust – but to prosecute the guilty – including those in the industry that ‘coalesce’.”

Andy Parr CYW Solutions Founder.

The tougher stance in Politics covers wider aspects of this as the EU blacklists whole jurisdictions, the US authorities keep driving prosecutions and fines for offending the Dollar and the EU makes it possible to convict for money laundering without proving a predicate offence and moves to include in evidence data stored outside of its jurisdiction.

Conclusion

Compliance consultants can see the market as rosy or they can recognise the headwinds and start to prepare to adapt. A simple Porter’s Five Forces analysis will show they are in a vulnerable position. They are being substituted by a new product, are much smaller than their buyer (the bank) with no option to purchase from their suppliers because they are smaller than those too.

This is a perfect strategic storm that they face. They cannot compete with a move to digital as they operate currently. They cannot ‘go digital’ because of the cost. They cannot compete with the substitute for them (the IT) because humans can’t compete.

They can diversify if they have digital consultative experience to become experts to advise on what systems to implement – but this is a short term solution and requires detailed technological knowledge.

The answer is to integrate forwards.

To merge into a global network that supports the digital transition to the financial industry, with expertise in the operation and integration of the digital solution. To actually supply the resource to the industry with human expertise in its operation.

Contact us today to secure a prospectus to join the future of compliance.

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