Compliance departments – A new revenue center for financial institutions

As new and innovative technology continues to disrupt long standing businesses functions, banking is proving to be no exception.  The days of simply opening up a branch and expecting new commercial prospects to flood your location are becoming a thing of the past.  Online lenders, crowdfunding sites, private lender investment funds and non-bank financial centers, among others, continue to chip away at the traditional commercial banking model.  While technology is impacting every facet of commercial banking, I want to focus on one area: compliance. Then discuss how technology can transform the role of compliance in your financial institution.

The compliance stigma

Traditional complaints about the role of banking compliance are well known: “Compliance is a layered expense.” “Compliance costs are a financial drain.” “Compliance is an obstacle to business expansion and risk taking.”  These negative perceptions about compliance have hardened into conventional norms that credit unions seem resigned to accept and rarely question.      

Consistent and effective compliance is essential to the safety and soundness of every institution. It keeps institutions accountable and protects the assets of stockholders, managers and members.  But effective compliance comes at a price.  With a seemingly ever-demanding regulatory climate, the cost of compliance has increased dramatically in recent years.  At the same time, the penalty for compliance breakdowns has never been higher, with significant fines and other penalties on the rise.  

This dynamic creates a dilemma for financial institutions: continue to devote more resources towards compliance, or withdraw from markets and members deemed high risk.  Either way, the result for financial institutions is inevitably less revenue, at a time when the need for non-interest revenue has never been higher.  Is it any wonder why compliance has become stigmatized as an anchor on the bottom line?   

I speak here from firsthand experience, as that was my view of compliance when I worked at financial institutions in various leadership positions.   But as the role of compliance has begun to change, so too have my views— specifically about how banks can turn compliance to their advantage.  

Changing perceptions of compliance

Two years ago, I joined a young Fintech/Regtech company called Hypur, which is dedicated to assisting credit unions service cash-intensive businesses—precisely the type of “high risk” members so many credit unions have been avoiding because of perceived compliances challenges and costs. Now, I regularly travel across the country to meet with credit unions about how to conduct compliance more effectively and efficiently with the Hypur technology. And while negative perceptions of compliance remain widely held, we are slowly starting to see a change in that perception as credit unions recognize how the right technology can transform the compliance landscape.   

To give just one example, I recently met with the senior leadership of a credit union— CEO, COO, and Chief Compliance Officer (CCO)— to discuss how to improve their institution’s compliance capabilities. Like so many other institutions, they had refrained from banking certain verticals, despite the revenue potential, because of perceived compliance costs and challenges.  But after I walked through the compliance technology Hypur provides, the CCO immediately recognized the potential and spent half an hour explaining to her CEO and COO how it would enable their credit union to enter several new and lucrative verticals.

The CEO sat back in his chair with a grin on his face and said, “So it sounds to me like our compliance team just went from being a layered expense to a new revenue department for our institution.”  Everyone in the room immediately grasped the significance of that statement.    

Stay tuned for the second part of this article in the next issue where I share the trend of compliance barriers slowly but surely coming down along with my seven-step challenge that every financial institution should consider.

This article was authored by Hypur’s Executive Vice President of Sales Todd Fuller in collaboration with Hypur’s Executive Vice President & General Counsel John W. Vardman and Executive Vice President of Banking & Compliance Andre G. Herrera. For more information about compliance or Hypur, please email banking@hypur.com.