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Traditional banks’ risks. Reign the business rules

The analysis of inefficient cost structure in banks, which has become evident amidst coronavirus disease outbreaks will be discussed in our next article. Few other key risk indicators for banks in the Eurozone – according to European Central Bank (ECB) – will be listed as well. 

As for now, let’s see what Fintech can offer to enhance operational management and reduce banking risks to minimum.

Coronavirus outbreak reveals the Achilles heel in banking risks management

As a representative of ECB stated, bank supervisors are concerned about low profitability and shift their focus on banks’ future resilience and sustainability. Coronavirus disease outbreak has vividly demonstrated the fact that risk management in traditional banking is a lame duck. 

Moreover, business models of traditional banking appeared to be sluggish in facing rapidly changing economic conditions. Lack of flexibility in adopting new challenges and responding to tough calls of coronavirus pandemic has pushed lots of banks to the brink of close disaster. To avoid catastrophic consequences, banks’ leaders have to turn their face toward digital technologies and Fintech.

Don‘t get lost in the Minotaur’s Labyrinth, or digital technologies in business model processing

Banks and financial organizations are built upon complex business rules that regulate many day-to-day interactions, from lending decisions to detecting fraudulent activity. These rules are constantly modified because of changes in company policy, new regulations, or business model enhancement to keep an organization competitive. Therefore, rule changes need to be handled swiftly, timely, and with careful attention.

If rules are out-of-date, or inaccurate, or ill-timed, a bank might be vulnerable to penalties and fees from the government, be affected by economic situation changes, or even lose its position in the market. In addition, delayed rule changes can lead to missed opportunities, resulting in lost revenue and slower (or even negative) corporate growth.

There are several banking risks that involve the IT-sphere. When financial services rules are changed, it is vitally important to find a system that does it correctly. For example:

  • Errors. IT staff have deep knowledge of software and technology but they are not experts in regulations and industry details specific to banking and finance. This leaves room for unintentional errors or omissions.
  • Delays. When regulations and economic conditions change, rules must be modified fast and in a timely manner to ensure compliance, which might be difficult because of thin IT resources.
  • Lack of validation. Misunderstanding and uncertainty can result from a lack of transparency of rules and processes. This lack of system’s inner workings transparency hampers users from validating what the system is doing and what it is supposed to do.
  • Customer frustration. Customers expect greater levels of customization and self-service. They require 24/7 access to documents, balances, and other key account data. They are eager to be able to perform routine account tasks, which is difficult to achieve without a customer self-service initiative that is built on business rule technology.

Rule management technology can empower banking and financial organizations to overcome these rule change risk factors. Business rules can be managed either by man or machine. The typical BRMS structure is shown in Fig. 1.

Fig. 1. Business rules management structure. Source: JK Technosoft

Manually-made decisions use software support, in-depth industry knowledge, or policy and procedures manuals. But many of the most vital and complex decisions are made by machines. They are automated and rely on application code, table-based approaches, basic workflow rules, or business rules management systems (BRMS).

Irina Vertinskaya, the Head of Business Analysis at RNDpoint, compares BRMS with some inborn body functions like breathing.

Normally, there is no need to control it. The same with BRMS. It works automatically and seamlessly. But still, both breathing and BRMS can be changed according to current conditions and needs.

Irina Vertinskaya
Lead Business analyst

Business rules management system is Ariadne’s thread

A Business Rules Management System is a software used to install, outline, monitor, perform, and maintain the complexity of decision logic used in operational systems in an organization. 

Business policies and regulatory compliance data are securely locked behind lines of code inside multiple software systems and usually not accessible to leaders and managers responsible for executing business policies and protocols. BRMS provides customized solutions to react quickly to all kinds of business rules and policies in a far efficient manner than traditional methods do. 

Irina Vertinskaya suggests that the major advantage of BRMS is the opportunity to separate specific business logic from application code. It makes business rules management more accessible for business users and thus more flexible and timely. 

The key vendors in the BRMS market are Bosch, FICO, IBM, Fujitsu, Oracle, Progress Software, Red Hat, and Newgen Software. 

BRMS’s approach to tackling the changing rules is highly efficient as it cuts short the development and change cycle by 90%. Once the ruleset is defined for the bank’s credit policy, it can be consumed by all the channels seamlessly, be it branch applications, mobility, or over the portal. It’s not a surprise that Rules Management System implementation is increasing globally. 

Fig. 1. Global Rules Management System implementation forecast. Source: Markets and Markets.

Business Rules Management System covers different areas of banks’ activities:

  • Credit and loan approval
  • Underwriting
  • Eligibility determination
  • Compliance and reporting
  • Account set up and validation
  • Applying for products
  • Cross-sell and up-sell
  • Dynamic pricing and bundling
  • Product recommendation
  • Generation of routine rules
  • Loyalty programs and Customer Insights
  • Risk-based pricing
  • Regulatory compliance

Business rules management system. The safe path between Scylla and Charybdis

BRMS functions in conjunction with the core banking system grant an opportunity to achieve three core functions:

  1. Allow non-technical, business users to change rules and calculations in applications without programming. Enabling internal experts who have a deep understanding of market regulations and conditions to make changes quickly, without programming, boosts compliance, competitiveness, and corporate growth. In addition, when business users are allowed to create and modify rules, IT personnel can focus on higher-level tasks.
  2. Provide transparency into mission-critical processes. Eligibility and loan origination, credit scoring, fraud and money laundering detection, and compliance. Reports from within a BRMS provide the risk management team with the data needed to ensure that the organization is compliant with local legislation.
  3. Create intelligent and customized consumer-facing banking portals. BRMS puts customers in control by allowing them to review account details and access needed forms and information that is extremely important in today’s consumer-driven, tech-savvy marketplace. In addition, BRMS can suggest products or services that might better suit customer needs, providing a unique cross-sell/upsell opportunity for additional revenue generation and a higher level of customer commitment.

The 13th labor of Hercules, or Business rules management system in action

A client of our company had an ambitious plan of developing a Minimum Viable Product (MVP) which should provide its customers with the opportunity to order and get a virtual bank card and apply for a loan through chat-bot. MVP is characterized by its extreme flexibility to react to customers’ demands immediately. That’s why the feedback of the bank’s clients could have been taken into consideration at once.

As we have mentioned above, BRMS allows non-technical business users to change business rules by themselves thus making business processes flexible and easily tunable. Our team has implemented business rules management system in MVP making it as flexible as possible both in changing scenarios to unfold for credit conveyor and adding more product options and services. 

The Conclusion

The era of digital transformation in business forces traditional banks to put outdated strategies aside and completely rebuild business models. And BRMS helps the banking industry leverage technology to meet new challenges that have emerged during the coronavirus outbreak. 

Developing and building an effective BRM capability is sure to result in increased value outcomes, business performance, and streamlined business processes.

Our next article is going to put business processes in banks under our scrutiny. Are they managed effectively? How can Fintech help improve them?


Sergei Artimenia

Director of Business Development

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