- 3 years ago
Indian organisations spend Rs 95 crore on an average on financial compliance, according to LexisNexis Risk Solutions. How can financial organisations minimise compliance costs?
In conversation with LexisNexis Risk Solutions' Ramanathan Sivabalan. #BQLive
In conversation with LexisNexis Risk Solutions' Ramanathan Sivabalan. #BQLive
Category
🗞
NewsTranscript
00:00 Hello and welcome. You are watching BQ Prime and I am Mimansa Verma.
00:05 In the last few years, Indian financial institutions have gone big on adopting digital technology
00:11 for seamless and efficient banking and payment services. But it is also true that a sizable
00:17 portion of Indians have been defrauded in some way or the other. Now, to combat the
00:22 financial frauds, financial institutions have had to redefine the compliance processes.
00:29 In fact, an RTI response by a news organization showed that between 2014 and 2023, Indian
00:36 banks lost Rs 4.7 lakh crore on account of frauds. We have Mr. S. Ramanathan, APEC Head
00:45 of Market Planning, Financial Crime Compliance and Payments from LexisNexis Risk Solution,
00:51 joining us to talk about how much Indian financial institutions spend on an average to ensure
00:57 financial crime compliance. Thank you so much, Mimansa, for your question.
01:02 And thank you for having us here today on your show. And we at LexisNexis Risk Solutions
01:08 are completely with you on this quest. The problem with the fraud is not unique only
01:16 to India. So let us take a step back and let us look at what the survey shows. So we know
01:24 for a fact that when we query our institutions, institutional plans here in India, roughly
01:32 about 95 crores is the average spend for each financial institution. So it is not the question
01:38 of money, it is also the question of scale. So when you look at scale, it comes from two
01:44 particular attributes. A, the amount of clientele that the banks serve and more, the amount
01:52 of volumes that our banks have to contend here in India. So when you compare that as
01:58 a whole, India has come a long way. What started off with the initial focus on KYC or Know
02:05 Your Customer has then focused more attention on customer due diligence, CDD, and has due
02:13 diligence as far as EDD, that's what we call it. And now grappling with this twin issues
02:19 of cybercrime and more importantly, stolen identities. So the field of financial crime
02:26 has evolved in India. Second of all, you need to contend the fact that India as a whole
02:32 has been developing over the last few years. As a middle economy and to now becoming the
02:39 top five in the world, you are seeing the significant profile change of the population
02:43 as a whole and as a content, the risk also increased. So when you look at it, primarily
02:52 from a context of a local bank, which is like contending to the needs and interests of the
02:58 local population, there has been a significant increase. So the last World Bank report denotes
03:04 that India was the largest single net remitter of foreign exchange into the country. So that
03:10 basically means cross-border fraud and remittances become a source for tapping into frauds. The
03:17 second is obviously the explosion on digital payments. Hitherto we have been used to working
03:23 with traditional models, but with the global popularity of UPI and digital means of payment,
03:30 you are now seeing a new typology of work, which was not contended when the original
03:36 regulations have been. We need to give credit to the Reserve Bank of India and the Government
03:40 of India to come up with regulations to stop this and evolve this. The recent amendments
03:45 in the KYC Act, as far as recognizing these changes have been well noted. All in all,
03:54 financial crime has been regulated by the FATF, the global body of the G20 and the world,
04:02 which comes down to setting the rules as far as what financial crime compliance standards
04:06 have to be. And India has been always noted as one of the pioneers to set the bar. In
04:11 fact, India is right now going through the fourth phase of mutual evaluation and we are
04:15 supporting our clients, the leading banks in India, to help achieve their objectives.
04:20 But there is still a significant way when we look at the population of India, when we
04:25 look at the tier one banks that serve the marketplace, but also the tier two and the
04:29 mid-tier local banks, which serve the wider populace. And there is this gap. So, I am
04:35 not too surprised that the statistic that you share, and it is so not different from
04:41 what we see in the rest of Asia. So, financial crime compliance, as far as the world is concerned,
04:47 is increasing. And as far as India is concerned, it is also changing, which was traditionally
04:54 a more of an identity KYC issue, has largely been put to rest, thanks to the phenomenal
05:00 development and success of the Aadhaar stack and the KYC interface. But now, what is the
05:06 next step is to get the digital identity in place. So, that is where I see the recent
05:11 amendments to the RBI KYC norms, which have been trying to align the Indian definitions
05:17 of ultimate beneficial ownership with the international norms, and more importantly,
05:22 getting the companies and the RBI regulations to start talking in sync. You are going to
05:26 see that.
05:27 Right, right. Fair enough, sir. You mentioned about RBI and the regulatory provisions or
05:36 the rules that they can change. We will touch upon that later in the conversation. But if
05:40 we talk about costs, the report that LexisNexis Resolutions had released, it shows that per
05:47 organization, the cost comes to about $11.5 million for an Indian organization, which
05:55 is roughly 95 crore rupees. India's sample size in the survey is pretty low for now,
06:02 only 5% in the survey. But what is your sense on the total cost? And if we compare India
06:08 to comparable economies in Asia, like Philippines and Indonesia, how do you draw that comparison?
06:16 How does India stand in the Asian economies? And if we compare it to Philippines and Indonesia,
06:22 how does India look like?
06:23 Thank you. That's a very great question. And the problem with statistics and surveys, that's
06:31 the devil is in the details. So the reality is that when you look at an organization like
06:37 LexisNexis, and when we sample the world, we have only that limited bandwidth to really
06:42 sample. India is itself almost like a mini universe. So, you know, we can't really fully
06:47 sample the population. But what we do is look at a kind of a cross mix between large, middle
06:54 and small organizations. And that's what our survey found. Now, the number that you see
07:00 on your screen at $11.5 million, it's not too different from what we are seeing in the
07:07 rest of Asia. There are obviously economies which are larger than us, but there are economies
07:12 which are much lesser than us. But it all depends on the relative journey on financial
07:17 inclusion. So for instance, geographies which have a larger tendency to have digital transactions
07:24 or high volume, or we have larger number of customers, you will see a far more spending
07:29 as far as financial compliance is concerned. The aim and intention of our survey is not
07:34 really to measure cost, but to really look at the reasons why that cost is incurred,
07:39 how we can bring about better efficiency. So from that perspective, India tracks well,
07:45 given the demographic size it has, for the kind of complexities it faces, I think the
07:50 average spend for an Indian organization as a whole, just not the cost or just the people
07:55 or the actual spend on financial compliance, but the holistic cost. I think that tracks
08:01 well compared to the rest of Asia. As far as Philippines and Indonesia are concerned,
08:07 you particularly raised that, these countries are going through their own journey as far
08:11 as the revolution as an economy is concerned, particularly Philippines. Let me tell you
08:17 that they do not still have a unified national ID, and their government is right now working
08:22 steadfastly and that's one of the inspirations is what was achieved in India. So they are
08:27 actually looking at how they can bring that unification of customer identification that
08:33 can overall reduce the cost of compliance. So we at LexisXSS Solutions are working with
08:37 them and trying to give them this kind of pioneering ideas. But more importantly, also
08:41 looking at Indonesia, where we are trying to look at the big challenge that they have
08:45 faced as far as addressing a very diverse customer base. Indonesia is the world's largest
08:52 market, Sachi Piccadilly, so they have customers over 14,000 islands, how do you get inclusion?
08:57 So that's one thing that we are working with the government of Indonesia. So each of the
09:03 geographies have their own particular challenges to look at just from a cost perspective would
09:07 not be the right way to look at it, in my opinion.
09:11 Got it. Mr. Shivbalan, the report also says that the financial compliance in APAC region,
09:18 the cost for financial compliance is high because of the expensive technology and labour
09:23 costs, the high labour costs. So what are some of the key issues specific to India when
09:29 it comes to complying with financial crime norms?
09:32 Very good question. Again, you know, for any compliance program to be successful, there
09:41 are three essential ingredients. The first and foremost is the people, right? So getting
09:47 the right kind of people to sit in your program to ensure that you meet your regulatory objectives.
09:53 The second is the process, the process itself, how you ensure that compliance is delivered.
09:59 And last is technology. For me, I think the people first come and then the process and
10:03 technology. Now, let me just spend a little time on each one of these pillars. So when
10:08 you look at the people and in a compliance program or trying to ensure that we are able
10:15 to achieve financial crime compliance, we need to ensure that they are appropriately
10:19 hired and trained and able to perform their duties. The second part, obviously, in India,
10:26 an extremely competitive labour market is to retain the people. So retention of talent
10:31 has been a crucial factor in differentiating how well a person can remain in the job. So
10:40 there is a lot of competing demands. There's a lot of opportunities out there for a young
10:45 person to pursue a career in compliance or not. So in a compliance program, and you look
10:52 at it as a whole, it's actually a bell pyramid. A majority of people don't really necessarily
10:59 sit at the start. So there's a bunch of freshers, but the bulk of them sit in the middle. So
11:04 to get the right mix of cost and people becomes a big challenge. The second part is process.
11:10 Now, financial crime historically has been relying on traditional data as far as when
11:17 customers are onboarded. So historically, customers were onboarded in bank branches
11:22 or agents were filling up traditional forms or paper-based KYC or such like that. Now,
11:30 more and more customers are onboarding digitally. But having said that, process is quite complex.
11:38 There are multiple touch points and there are multiple intermediaries. So the first
11:43 part is how complex is your onboarding process? How many are the touch points that you have?
11:49 And that basically brings to the next part, which is a risk-based approach, which is that
11:53 how often your organization has actually conducted a risk-based approach to see how efficient
11:59 your customer onboarding organizations. So that impacts the people aspect. How many people
12:05 do you need to really get your customers in and how many people you need to really manage
12:09 them at the end, looking at the financial crime risk. And finally, it's about how well-integrated
12:15 your organization is. Traditional banks still function in very much silos, and then they
12:22 really don't talk with each other. Departments, operations, KYC, compliance, technology, they
12:29 don't really talk to each other. So this creates a big gap. So the process element creates
12:34 that gap. And finally, coming to technology. So technology is often touted as the panacea
12:42 to all the problems that people and processes create. But the reality is that technology
12:47 is the last element. So long as you get your people and processes mixed correct, technology
12:52 can help that. And that's where, from two perspectives. So the first part is that right
13:00 now we all accept with the explosion of digital transactions, digital is the way forward.
13:06 There are multiple data which is available within the organization. The issue is that
13:11 they get siloed. They get siloed into one particular process, or they get siloed into
13:15 one particular department. And how do you harness both of that? So getting the data,
13:21 unifying the data, and more importantly, augmenting the data. So what is augmenting of data? So
13:27 when you onboard a customer, you're practically trying to look at dynamic as far as the person
13:32 is concerned, the income, and as far as the demographic. But we are also looking from
13:38 a compliance perspective about all the financial crime, you know, identifiers. Are you rightly
13:44 doing that? Or are we spending effort to duplicate that in a separate process? So to bring that
13:50 unison is very critical. So long as we have conquered this augmentation unification divide,
13:57 we can come to the technology solution. And what we are looking at, the world class organizations
14:01 in India have been doing it, is that they have been trying to synergize these two activities
14:07 and leveraging what the next generation technologies offers.
14:11 A lot of moving wheels. So my next question is, can this cost be minimized? Like what
14:16 are the some of what are some of the strategies, or any possibility that you would suggest
14:21 to minimize the cost incurred on financial crime compliance?
14:27 So actually, we try to again, attack this on three pillars. So going back to my original
14:32 hypothesis of people, process and technology. So looking at people, right, you need to really
14:37 be able to get your people to focus on what their main objectives are. There are a whole
14:43 lot of mundane activities that most of the financial crime compliance or fraud organization
14:48 is involved in, you know, identifying patents and trying to figure out, you know, recurring
14:54 themes. But the reality is that there are now technology solutions that can help you
14:59 do that. What we can really use our people to do is to do more cross training, more education
15:04 and more importantly, look at enhanced due diligence that can help further objective.
15:10 Second is the processes. Like I said before, most of the compliance processes are siloed,
15:16 they are split between multiple departments, you need to get those data assets to talk
15:20 very seamlessly together. To that, you need to have one framework that can, you know,
15:25 unify them all. So having systems that can cut across organizational layers, and get
15:31 the first line, second line and third line of defense, as we call it in banks, aligned,
15:36 it becomes very crucial. Finally, nonetheless, technology, leveraging technology becomes
15:41 crucial. Why is that important? Because more and more of transactions are now becoming
15:48 digital. The last study that we did at the start of the year, we identified that almost
15:54 27% of the global trade right now is done to digital transactions, roughly around 16
16:00 trillion dollars. So if you can imagine the volume of that kind of sums are flowing digitally,
16:08 that means that there was no human intervention in it, except for its origination, but to
16:13 its conclusion, because everything else was just settled. Why do we have manual processes
16:18 that intervening? You need to look at it fundamentally different than you need to create a solution
16:23 that can take care of that kind of volume. Secondly, we need to leverage the newer technologies.
16:31 There are a lot of regulatory challenges as far as adoption of new technologies. A, because
16:36 regulators don't understand, but more importantly, banks themselves don't really understand how
16:40 to implement them. So you need to have support of someone who understands these technologies
16:45 can implement in a practical, explainable way.
16:48 Mr. Shivbaran, this brings us to the last question. Do you think, because we touched
16:53 upon this earlier in the chat, do you think there's something that RBI could do more to
16:59 ensure that frauds, the financial frauds of such magnitude do not happen? And is there
17:04 is a need to tighten controls on financial institutions to ensure that there's no repeat
17:11 of such instances?
17:15 So I think it's a very good question, Mimansa, but let me first commend the Reserve Bank
17:19 of India and the Government of India for taking the leadership and recognizing this. In fact,
17:25 Reserve Bank of India and the Government of India have been taking utmost steps to protect
17:30 the population against the rise of frauds. In my discussions over the last few years,
17:35 I have realized the Government of India has perfectly seized on to this issue. In fact,
17:41 if you consider the last national rate assessment, frauds and cybercrimes were rated as the top
17:46 risk and it's out of the public domain. Anyone can consult and see. So at this point of time,
17:52 all I can assure you is the Government of India and the Reserve Bank are fully seized
17:56 and fully focused on tackling the menace of fraud. And the problem with fraud is that
18:02 it's going to continue to evolve. It's not going to be something that will stop right
18:07 now. The damage to the Indian economy is close to around $10 billion is the estimate made
18:12 in the NRA. But I feel that estimate is pretty conservative. It should be much higher than
18:18 that. But having said that, what I really appreciate is the fact that not just the regulators
18:25 or the government, but also the institutions are paying heed. We are seeing most of our
18:31 top clients in India, and not only the top clients, but also the emerging clients in
18:36 India pay attention to us and start having conversations on frauds.
18:40 Quite an insightful discussion. Thank you, Mr. Shiv Balan for speaking with us today.
18:46 This was Mr. Ramanathan Shiv Balan from LexisNexis Risk Solutions talking to us about the true
18:52 cost of financial crime compliance in India. For more news and updates, keep watching BQ
18:57 Prime.
18:57 [MUSIC]
19:04 [BLANK_AUDIO]
Comments