A review of the impacts of poor data management in financial services

Jul 18

4 min read

Effective data management is crucial for financial services due to the industry's reliance on accurate, up-to-date and secure information. Poor data management can have severe repercussions across various aspects of a financial institution's operations. Here’s an analysis of the impact of poor data management in different aspects of financial services.

Operational Efficiency

Accurate and timely processing of data are necessary for maintaining efficient operations. Poor data management can lead to delays in transactional processing along with errors in daily functions that will then need to be corrected. The result of this will be wasted employees' time, as well as a potential loss of income. The extra work needed to resolve errors in data also means extra expenses spent on staff wages, overtime and delaying progress in other areas or new projects. Knock-on effects of inadequate operations will be felt throughout a whole company, potentially resulting in missed deadlines, dissatisfied customers and unnecessary increased expenditure.

Regulatory Compliance Issues

Financial services are heavily regulated and institutions must comply with numerous laws and regulations regarding data accuracy, reporting and privacy. Poor data management can lead to inaccurate reporting and non-compliance with regulations such as GDPR, AML (Anti-Money Laundering) and KYC (Know Your Customer). The consequences of failing to comply with these legal requirements can be large fines, penalties and reputational damage. Between 2010 and 2018, the banking company HSBC was found to be deficient in its anti-money laundering procedures and transactional management resulting in a £91,352,600 fine. The immediate payment by HSBC gave a 30% discount to the company but they were still required to pay £63.9million for their failings to meet legal requirements.

The potential for legal guidance to change, means that financial servicing companies must always be up to date on their data management and update their processes as soon as possible to prevent potential legal consequences.

When security measures are inadequate, the risk for data breaches and the exposure of confidential customer information is heightened. If unauthorized access occurs, there is the potential for financial crime, identity theft and reputational damage to the customer, depending on the nature of the data exposed. Any information that can be used to identify a person is protected by GDPR law; release of this data opens a business up to legal action from customers, as well as regulatory bodies such as the Information Commissioner's Office (ICO).

Financial Loss

There are multiple reasons as to why poor data management can lead to financial loss for a business. Outdated, incorrect or inaccurate data can lead to poor investment choices resulting in losses. This will directly influence an institution’s profitability and long term financial health. Where customer banking and investment is involved, these poor financial decisions won’t just affect the business. This could lead to losses for the customer, as well as further potential damage from financial crime.

When customer data is poorly managed, the likelihood of fraud is increased. Not only will financial crime negatively impact the business’s reputation, the cost of reimbursement for customer losses can be heavy. Currently, UK based banks operate voluntarily to reimburse losses incurred as a result of fraud. However, new guidance will come into place in October 2024 requiring cases to be assessed, and only rejected where the bank can prove the customer acted with gross negligence.

Under this new guidance, reimbursement will be capped at £415,000 per case of proven fraud. Strict controls can reduce the occurrence of fraud, protecting customers and reducing the need for reimbursement.

Customer Trust and Retention

Customers expect financial institutions to handle their data securely and accurately. Data breaches, errors in account information, or slow responses by customer services in resolving raised issues, can erode customer trust and satisfaction. Where poor data management leads to the exposure of personal customer information, customers may move to other institutions where they feel their data is kept safe.

Trust is absolutely vital in maintaining a good customer relationship and when this trust is lost, it can be very hard to recover for that individual. With so many competitors available to switch to using the newest encryption and security technology, a customer doesn’t have to stay. The ease of changing to a new financial services provider, means that customer relationships are key to maintaining long term financial health and preventing loss of customers and revenue.

Decision Making and Strategy

Data analysis is crucial for decision making and long-term strategic planning. When data inaccuracies or deficits are present, this reduces the ability to make well-informed decisions, for example in a long-term investment plan to generate revenue. It can impair the ability to accurately assess risk when forming a future plan and so can lead to unexpected losses. When market data is not kept up-to-date, there can be missed opportunities for investment and advancement. Technology and software is constantly evolving in the fintech world. For this reason, a future plan is necessary to avoid being a target for fraud by falling behind in security, for ensuring customers feel safe using the business and to keep the attention of potential investors.

Innovation and Competitiveness

If a company wants to beat its competition and move into the future, it needs to be able to develop new products and services that meet the demands of its customers. Analysing usage data, feedback, complaints and market trends can provide this much needed information, but it’s worthless without efficient and timely data management. Without this, a company will struggle to innovate.

Superior data management leads to businesses with a competitive advantage; providing the services that customers are searching for.

Conclusion

The impact of poor data management in financial services is multifaceted, affecting regulatory compliance, financial performance, customer trust, operational efficiency and innovation. Financial institutions must prioritize robust data management practices to mitigate these risks and ensure they can operate effectively, maintain customer trust and stay competitive. Investing in advanced data management technologies, implementing stringent data governance policies and fostering a culture of data accuracy and security, are essential steps towards achieving these goals.

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