Digital Bank Regulation – Those ATMs Started It All!

By Gavin Pugh, Head of Risk Solutions Asia Pacific, Adenza

With the advent of ATMs in the 1970’s and ‘80s, banks adapted quickly to this modern technology and – amazingly – were able to service their customers 24/7. If you think about it – this was the genesis of digital banking and, eventually digital bank regulation. Then, when the internet reached critical mass in the 1990s, online banking emerged making traditional bricks and mortar banks anachronistic.

A Cautionary Bubble Tale

Not long after, the first digital upstart came on the scene. Remember Wirecard? For all banks now under digital bank regulation, this is a cautionary tale. Wirecard launched in 1999 – the year of the dotcom bubble – and failed the following year. It was revived, expanded, then in 2020, filed for bankruptcy due to false accounting practices. Every bubble has its Facebook and Google, but also its Enron and Wirecard.

The Rise of Digital Banks

Today, traditional banks are experiencing disruption from the fast-paced emergence of digital banks. And with that comes digital bank regulation. Regulators are quite open to issuing virtual bank licences, an attitude that is fostering innovation and competition in the marketplace. This digi-disruption will create a more inclusive banking environment.

A good example of this transformation is happening right now in Asia-Pacific where a sizeable portion of the marketplace consists of small and mid-size enterprises (SMEs), millennials, and the unbanked – all customers that typically do not have credit histories. This clientele represents a massive opportunity for digi-bank start-ups in Asia-Pacific and around the world. But major challenges come with the opportunity. If they are not addressed properly, with faultless competency around digital bank regulation, these new banks could end up like Wirecard.

Digital Bank Regulation – Licensing With Regional Flavors

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From a regulatory perspective, digital banks face licensing-decision challenges because when dealing with this new breed, regulators are taking different approaches regionally. Digital bank regulation in Europe and the US tends to resemble the requirements for physical banks in terms of credit due diligence. Therefore, Europe and US digi-banks tend not to apply for a full banking license. Rather, they may apply for an alternative payments license.

In contrast, in Asia-Pacific, specifically in Singapore, Hong Kong, Malaysia, and the Philippines, regulators tend to issue dedicated digital banking licenses. On average, once a license has been granted and the bank passes the acceptance criteria, it takes two years for the bank to begin operations. But two years is a lifetime in technology.

So, How Can Digital Banks Best Prepare For Healthy Life After Licensing?

The key is looking ahead. The technology applications they may implement in two years’ time must rest upon a flexible data management and regulatory reporting foundation. By building the right foundation, banks can successfully deploy, go to market, then scale and adapt as market, technology, and regulatory conditions change.

Here are some key foundational capabilities digi-banks should marshal in advance:

 Regional regulatory expertise – Stringent regulatory penalties persist for banks that incorrectly report data whether by misclassification of data or failure to report data in a timely and accurate fashion. Regulators are aware that digital banks do indeed have the same masses of data as their physical counterparts, so their expectations for accuracy may be even higher. Digi-banks should seek to work with partners who excel at data transparency and provide processes that instil BCBS 239 compliant data quality.

  • Continuous innovation – In the digital banking platform for this age, automation should be embedded bottom up, thus serving as the basic DNA of the banking core. Banks should look to partner with vendors that have a long history of bringing innovation to the marketplace. They need access to processes and approaches to data management that flexibly adapt to their profiles.
  • Cloud-first approach – The benefits of the cloud lend themselves natively to the premise of a digital bank. Many traditional banks must contend with clunky legacy data in different formats and creaky technology architectures so big that they are the proverbial elephant in the room. A new business deployed in the cloud will not have the legacy issues that incumbents have, so digi-banks should seek providers with secure established cloud offerings and deep cloud operations experience.


The Simplicity of a Single, Strategic Framework

Adenza’s AxiomSL has been selected by several digital banks recently awarded licenses. Their rationale was clear. With one framework to manage risk calculations and digital bank regulation requirements, the banks can open their ‘doors’ confidently. Adenza’s end-to-end processes inherently enable a single source of truth for both regulatory reporting and internal stress testing. Within a single framework, the banks can deploy solutions more efficiently and effectively in a faster timeframe. Choosing Adenza allows digi-banks to avoid the pitfall of building costly tactical solutions that serve no strategic agenda.

Adenza’s solution suite natively understands the challenges of being an upstart as it is the result of bringing two leading applications together – Calypso Technology’s treasury-based applications and AxiomSL’s risk and regulatory data management and reporting applications. Critical to the operating models of digi-banks, both offerings are in the cloud with SaaS environments.

Get Started Now

Digital banks engaging with Adenza will be partnering with a global technology leader that will enable a holistic view of their data, mitigate risks of accountancy issues, enable them to easily defend digital bank regulation examinations, and support their path to enduring business success in the new world of financial institutions to come.

To discuss and prepare for digital bank regulation requirements, contact us.

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Calypso Technology and AxiomSL have combined forces under a new name: Adenza. Adenza provides customers with end-to-end, trading, treasury, risk management and regulatory compliance platforms which can be delivered on-premise or on-cloud. Adenza enables financial institutions to consolidate and streamline their operations with front-to-back solutions integrated with data management and reporting, benefitting from a single source of truth across the business.



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