Compliance Platforms: To Buy or to Build?

To buy or build? This dilemma continues to be debated across institutions of all sizes, but even more so among credit unions. This is especially the case for compliance management platforms.

The NCUA has made stern promises to increase oversight. Last year, NCUA Chairman Todd M. Harper advised: “Since joining the board, I have focused on strengthening the NCUA’s consumer financial protection and fair lending resources. Given the consumer compliance examination program for comparably sized community banks, our program’s scope is insufficient, especially for those credit unions between $1 billion and $10 billion in assets. We should be doing more, and we can do more.”

To better manage compliance efforts and ensure a fair and equitable experience for members, a new approach is needed: Full-population compliance testing.

Today’s approach to compliance management is no longer sustainable. Most financial institutions today rely on manual, sample-based testing. As with any manual process, this approach is prone to errors. It’s also inefficient and requires exhaustive resources.

Sample-based testing also leaves room for increased risk. For example, to get a 95% confidence interval with a 5% error rate on a portfolio of one million loans, you would only need to test 383 loans. That leaves 999,617 unknowns that could leave you open to risk.

Beyond compliance violations and steep fines, credit unions may be exposed to more risk than they’re aware of, which inadvertently impacts members. Consider an active-duty service member going into foreclosure simply because the entire population wasn’t tested.

To ensure a fair and equitable experience, full-population compliance testing is both critical and responsible. With increased oversight promised by the NCUA, it’s also inevitable.

Full-population testing requires more resources. The challenge facing most credit unions is two-fold: Compliance costs are rising as regulatory expectations increase and compliance teams are shrinking. Most credit unions today are already operating with smaller teams. The average credit union has less than 20 employees.

Adding another layer of complexity is the fact that finding and retaining compliance talent is increasingly difficult, and even more so for those operating in rural areas.

Managing this process in-house is therefore not feasible. Credit unions would need to dedicate massive time and resources, which they do not have.

To put it in perspective, testing a portfolio of one million loans would require hundreds of employees and millions in salaries. Even if credit unions had those resources, it would take an entire year to complete.

Technology and automation are key. To stay ahead of regulatory requirements and ensure a safe and fair experience for members, credit unions must invest in technology and automation to make full-population testing a reality.

But building and maintaining a platform in-house is not sustainable, even with the best team in place. What happens when your most valuable employee decides to leave or is unexpectedly unavailable? This can prove extremely disruptive and put your credit union at even greater risk.

An in-house platform also requires a full team to manage, which makes scaling your business difficult. Rather than dedicating resources to manage compliance efforts, credit unions are much better served to allocate those resources to high-impact responsibilities. They can do what they do best – serve members.

Credit unions don’t have to manage compliance efforts alone. Whether credit unions embrace innovation now, or wait for it to become a standard, full-population compliance testing is inevitable. Fortunately, they don’t have to manage this process alone.

By leveraging best-in-market agile regulatory compliance solutions, credit unions can drive compliance with all federal and state laws and provide full-population compliance testing. This reduces the cost of maintaining regulatory compliance while also expanding coverage and frequency.

Full-population testing also eliminates surprises. Credit unions can have confidence that they are always exam ready.

Arguably most important to a credit union’s mission, they can prevent member issues through early detection and remediation, providing a fair and equitable member experience. Otherwise, credit unions run the risk of severely hurting members.

All platforms are not created equal. For credit unions in search of an outsourced platform, there are several factors to consider.

An ideal platform must first break down every law to its most granular level. This is key to integrating regulatory compliance into a credit union’s operations and developing algorithms for full-population testing.

A credit union must have a system that ingests laws, divides each law down to the sub-section level and then turns each sub-section into its own database element. This comprehensive process makes it possible to operationalize the laws across the entire organization.

Most platforms today do little more than ingest laws and then simply deliver them in a .pdf format. This makes it virtually impossible to operationalize.

Credit unions must also have access to full reporting, real-time dashboards and advanced analytics to allow them to monitor the state of their compliance program. As a result, credit unions can stay ahead of the curve, minimize their exposure to risk and ensure an equitable experience for all members.

As regulatory expectations increase, sample-based manual compliance testing will be replaced with automated full-population testing. This is inevitable. The challenge credit unions will face is whether to buy or build a platform to do so. Credit unions are already operating with lean teams, making the clear choice to buy. Those who choose to build and manage in-house systems will ultimately be faced with more challenges, putting their credit union at greater risk as well as their members.

Rohin Tagra Founder and CEO Azimuth GRC Jacksonville, Fla.