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Discover how banks are integrating disruptive technology into their business models and balancing risks and advantages in the ever-changing financial landscape of 2023.

The year 2022 brought the financial system a number of brand-new difficulties in the constantly changing world of money. A new conundrum surfaces as 2023 approaches: how can banks balance the benefits and risks of implementing disruptive technologies into their business models?

As he examines the convergence of economic, technological, and regulatory forces reshaping the financial services ecosystem, Tom Padgett, general manager of Smarsh Enterprise, which assists organizations in identifying regulatory and reputational risks within their communications data, sheds light on this. Compliance is poised to serve as a crucial interconnector.

The quantity of issues the global financial system had to face in 2022 was, in many ways, unprecedented. The challenges have been enormous, ranging from readjusting to a post-pandemic environment to navigating the extensive effects of the Russia-Ukraine War, such as the disruption of global supply lines or the worst inflation levels in decades.

While these issues still exist, a new dilemma has emerged for financial institutions in 2023: how to weigh the advantages and disadvantages of incorporating the newest, disruptive technologies into their business practices. This technological change has fueled an active regulatory industry that is working to not only understand the more complicated financial markets, but also to manage them well.

Together, these three headwinds—economic, technological, and regulatory—indicate that the financial services ecosystem will undergo a significant upheaval. Compliance is ideally situated to be a key interconnector at the center of this transition, improving how financial institutions operationalize and derive value from their data as well as advising regulators on how to create safer financial systems.

Changing the meaning of compliance for financial institutions

Banks have always handled compliance and data management by asking themselves, “What do we need to do?” Given that compliance with legal and regulatory regulations is a prerequisite to conducting business in the financial sector, the focused focus on this need is appropriate.

The issue arises, “What could we do?” when financial firms amass and manage greater informational pools. Banks should now focus on maximizing the value of their data rather than just minimizing risks. They should ask, “How can we derive value from all this data we have available to us?”

Some large financial firms are employing AI after investigating it. Morgan Stanley’s 16,000 financial advisors use an OpenAI-powered chatbot, while Daiwa Securities’ ChatGPT chatbot creates documents. Wall Street titan Goldman Sachs suggested a “ChatGS” A.I. Chabot.

These AI-powered data management systems will increase the communication data banks must gather and store. With this scale, banks can leverage big data to improve early problem detection and visibility.

However, some institutions have banned chatbots owing to regulatory concerns, so AI use isn’t universal. Smarsh, a compliance pioneer, is aware of these concerns, but from a communications perspective, AI is just the next advancement in a continually expanding profession.

Since email communications inspired our start over 20 years ago, we’ve adapted to new communication platforms like Microsoft Teams and WhatsApp. Thus, AI is a fresh technology but also the next communication advancement, which we are ready for.

My opinion is clear: AI is already normalized because people have been using it in apps like Google Maps for years. Thus, financial organizations won’t view it as a groundbreaking breakthrough for long, but rather as another intelligence tool to improve their operations. AI and other complex technology will make financial system management challenging for authorities.

Creating eco-systems that are safer through compliance

The widely accepted view is that the 2008 financial crisis resulted from regulators’ failure to understand and effectively manage the financial systems under their supervision. Despite this historical lesson, we are again witnessing a wave of regional US bank failures, which once again raises the issue of whether regulators are knowledgeable enough to oversee the increasingly sophisticated financial systems in which we operate.

Even more concerning is that financial institutions’ constant adoption of new technologies is reducing regulators’ ability to use past experiences to respond to financial crises. How should regulators manage future threats? This is troubling because, while we are familiar with traditional crises like bank runs, the dangers that matter are the ones we cannot forecast.

Communication compliance can improve financial institutions and help regulators secure financial systems. Compliance can alert authorities to potential concerns early on, avoiding the main issue of unforeseen threats from new technologies.

Since Smarsh captures and monitors the communications of the world’s top financial institutions, we know the power of applying our own machine learning and artificial intelligence methods to massive data sets to spot patterns and areas of concern. By anticipating dangers, regulators can protect the financial system.

Banks and regulators are often characterized as rivals, although they depend on each other to keep the financial system stable. To brace for future dangers, financial institutions should share the latest information with authorities. Smarsh may engage with clients to advise regulators in the future.

Compliance will play a crucial role in bridging the gap between the two pillars, contributing to a safer and more secure financial ecosystem as the financial industry evolves.

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