Five Mistakes Banks must avoid when setting up an IFRA

Five Mistakes Banks must avoid when setting up an IFRA

Many banks are currently working towards a central data warehouse in order to establish the basis for an integrated finance and risk architecture. Yet, our experience has shown that, banks are consistenly making the same mistakes. There are many reasons for this happening. The time frames for implementation set by supervisory authorities are often too ambitious to permit a comprehensive upgrade of the IT architecture. As a result, the budget for the investments needed to meet the regulatory requirements are often fairly tight.

We have seen the five common critical mistakes being made when an integrated finance and risk architecture is established:

  • Focusing only on complying with the regulatory requirements
    Regulatory requirements have increased over recent years, changes are made ever more frequently and the time frames for implementation are often very short, which can result setting up an integrated finance and risk architecture taking up to ten years. In times of persistently low interest rates, banks are challenged more than ever to review their business model and continuously work on their cost-income ratio. Reducing the headcount is not always the only solution. These days however, banks tend to focus on complying with the numerous regulatory requirements. As a result, the goal of creating an integrated finance and risk architecture, and thus improve efficiency, sometimes gets pushed to the bottom of the agenda.

  • Strict separation of IT, processes, and data
    Most projects ignore the interdependencies between the IT infrastructure and IT systems, business processes, and data. In some cases projects deal with these three components in isolation from each other just to meet the regulatory requirements. Poor acceptance of any technological changes and new developments may well be the result. IT systems are often inadequate to support the business processes and data aggregation requirements for the various functions, and new manual activities created to compensate for these weaknesses. This in turn leads to substantial investment errors because the benefits of an integrated finance and risk architecture are not realised, despite spending millions of dollars.

  • No sustainable structured data management
    Although many banks are working on developing a central data repository, they tend to forget to introduce the processes needed to support them. Moreover, only the data required to comply with regulatory requirements is stored in the data repository in a structured manner. As a result, the quality of the data is not sustainably secured, process efficiencies cannot be improved and the benefit of having a central database is extremely limited. At the same time, making the most of new technologies (e.g. predictive analytics) becomes more difficult.

  • Underestimating the culture change
    In times of increasing digitalisation of business processes, new working practices are becoming more and more important. This means that the required knowledge is shifting. Technical expertise in financial products and services as well as understanding regulatory requirements, technological processes and IT system functionality are all gaining in importance. This requires a culture change within banks. The barriers between the business and IT must be removed. Furthermore, the economic value of data, or rather information, is growing, especially in the banking sector. Data is effectively becoming a “new asset” that is to be exploited to the maximum potential, and the technological advances required for this have already been made.

  • Lack of investment in digitalisation
    Very few banks are investing specifically in digitalisation – yet it is more necessary than ever. The pace of regulatory changes are expected to slow, making it all the more important for banks to use the momentum and prepare for the future. For example, automating processes also helps with meeting regulatory requirements – and an integrated finance and risk architecture provides the necessary flexibility to react quickly when new requirements are introduced.

The consequences of these 5 mistakes are serious:

  • The executive board is paying less attention to the issue and are less willing to allocate the necessary resources. Budgets have to be renegotiated over and over again.

  • Inefficiencies increase, putting the bank’s cost-income ratio under sustained pressure. Dependence on head monopolies by using outdated technology remains. Heterogeneous IT system landscapes combine with high IT running costs.
  • Strategic targets are being missed.
  • Poor investment decisions are made because scheduled initiatives are not followed through to the end.
  • Poor acceptance of changes, declining competitiveness and outdated structures (organisational and process-related as well as technology).
  • Regulatory requirements, which are often defined as minimum targets, are not complied with.

Q_PERIOR recommends the following approach:

  • Review your project portfolio with a critical eye to leverage any potential synergies, for example by bundling similar topics whilst meeting regulatory requirements.

  • Define a clear benefit for every project.
  • Create added value from implementing sustainable data management. Make the most of modern technology and methodologies.
  • Link your risk management and finance subdivisions with sales and product development.
  • Introduce process cost accounting.
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