Banks have been struggling to adapt to changing, expensive regulations, and 2015 and 2016 will see further implementation requirements requiring large investments to achieve compliance. Here is a review of some of the more important ones and a look at the implications for bank operations strategy.

Key regulations taking effect over the coming months are:

• EMV (Chip-based payment cards) for U.S. payments, deadline 10/1/2015
• SEPA (Single European Payments Area) for E.U. payments, deadline 10/31/2016
• MCD (Mortgage Credit Directive) for E.U. mortgages, deadline two years after country adoption (e.g. March 21, 2016 in the U.K.)
• TILA RESPA (Consumer mortgage disclosures in the U.S.), deadline: 8/1/2015
• COBS 14.4 for U.K. capital markets, deadline: 10/31/2015
• Volcker Rule for U.S. capital markets/retail banks, deadline 7/21/2016 (possibly 7/21/2017)
• Basel III (increase bank capital as a percent of assets) for global financial institutions (universal banking), deadline staged between now and technical implementation in 2019.

In short, banks are facing continuing compliance implementation directives across all major process areas of payments, mortgages, and capital markets; and across all major geographies over the next 24 months and beyond.

Let’s examine the four key characteristics of these regulatory initiatives:

1. Regulatory synchronization across markets

Financial industry regulation is synchronizing globally across markets. This is true whether it is accomplished by single regulation (e.g. SEPA, Basel III) or by independent regulations written using the same framework (e.g. MCD/TILA RESPA, or EMV U.S./rest of world). Synchronized regulations are driving process and platform rationalization across the world for global banks. To date, bank efficiency ratios vary widely across countries and within countries. This synchronization will create a downward cost spiral that will require all banks to respond with aggressive cost control initiatives. As a result, banking services will become far less customized (i.e., commodity).

2. Increased disclosure to customers and other external parties

Regulations demand far higher levels of disclosure to many third parties. Pulling that data from legacy systems has been, and will continue to be, a challenge. Data management, acquisition, storage, analysis, and reporting will become increasingly important over the next decade. The greatest challenge today is managing data across the innumerable legacy silos within global banks. Transformation and management of the data silos will become the key data challenge over the next five years. To date, vendors have focused on data management within silos. Transforming data silos is a very expensive proposition, which no one bank will be able to do on a solely custom basis. Banks will need to form consortia to effectively manage the transition to more effective, and compliant data silos. The data transformation will be as profound and complex as the ERP transformation of the 1990s.

3. Increased cost of risk-based businesses

The new regulatory framework is changing the underlying cost structure of various lines of business. Transactions businesses (e.g. payments) require very efficient low-cost delivery, and risk-based businesses (e.g. lending) require high capital allocations and high compliance costs. Ultimately, banks will have to separate these businesses (even if there were no Volker Rule) into separate organizations. The riskier businesses will require a third party vendor ecosystem to help buffer the inherent operational volatility of those risky businesses. Meanwhile, the commodity businesses will require a third party vendor ecosystem to deliver a very different value proposition of aggressive cost savings.

4. Requirement for bank customers to invest in compliance

The banking regulations are intended to control banks, but require changes from bank customers as well. AML/FATCA/KYC imposes costs on retail and corporate customers to provide information to banks. EMV cards in the U.S. will require a massive investment in POS infrastructure by merchants. In the payments industry, third party vendor services profits have already moved to vendors supporting bank customers (i.e. card acceptance services). In the coming years, third party vendors will be growing services to support corporations and consumers in their need to interact with banks efficiently.

Summary: the impact on banks, customers and third party vendors

The impact of these regulations will reach further than changing banks’ operational delivery. Further key changes will include:

• Banks will have to:
  • Divide into two key types of businesses: commodity businesses (requiring much lower cost of delivery from increased automation, standardization, and shared overhead); and risk businesses, requiring greater operational flexibility, including variable capital
  • Improve data management, which requires a complete refresh of the legacy data infrastructure at banks
• Customers will have to:
  • Increase reporting to banks (and ultimately governments). Customers actively engaged in bank relationships will need to develop the capability to cost effectively create, update, and deliver data to banks in support of each new transaction
  • Improve integration into bank systems. For most customers, third party validation (similar to trusted traveler program in plan travel) will be needed to facilitate frequent transactions and/or global relationships
• Third party vendors will have to:
  • Reduce cost for commodity processing. Improved process management and labor arbitrage will be insufficient. Automation, standardization, and process consolidation will be required to deliver the scale of cost savings required
  • Increase flexibility for risk businesses. These single process businesses will require partners who can commit operational availability, for a share of profit, to enable clients to scale in highly cyclical businesses
  • Improve data management services. Third party vendors will need to combine ITS, operations, and marketing analytics consulting services into an offering that leverages client platform knowledge, industry knowledge, and analytics capability to support restructuring data management at banks
  • Support global standardization and consolidation. Simplification will drive lower costs and improved control. The ability of third party vendors to support simplification initiatives across sprawling bank environments, both global markets and multiple business lines, will be key to generating the highest efficiency savings.