FCMC’s approach to innovations

When leaders of organization encourage experimenting culture and application of new technologies, they build trust with employees and open creativity. Today, I want to give some tips on how to improve and implement new innovative solutions in an organization and share the Financial and Capital Market Commission’s (FCMC) experience in adapting innovations in supervision.

I joined the FCMC at the end of 2020, when the Financial Innovation Department was set up as a result of internal changes within the FCMC. The major role of the department among supervision role, is to contribute to developing a financial (innovative) technology environment in our country by supporting fintech companies in their development, at the same time caring for the implementation and development of internal SupTech and RegTech solutions, in order to make the supervision process more efficient, modern and automatic. One of the outcomes was the approval of FCMS’s new SupTech strategy at the beginning of 2021.

While developing the SupTech strategy, plenty of technologies such as network analysis, robotic process automation, webtech, open data, cloud solutions, natural language processing, optical character recognition and other have been reviewed and analysed with the aim of targeting the right path to meet our business requirements. New technologies provide a significant impact on regulatory activities likewise in the commercial sector. Businesses, governmental institutions, NGOs, regulatory functions meet the same challenges: how to adapt new technologies, how to digitise processes and how to implement innovative solutions: incremental or radical. The most challenging for sure, is the development of innovative culture in the organization and continuous growth of internal competences and capabilities.

In that phase we understood that it would not be enough with individual technology promoters in the organization, whose role usually plays the IT team, but we need to raise sustainable skills and competences and create an internal innovation lab – open space for employees and experts from different departments to work, discover and experiment on new technologies, and find the best solution or innovative approach for our regulatory and supervision processes. As a result, at the beginning of 2021 iLab was born!

What is iLab and what is it for?

iLab is the place where everyone in our organization may generate ideas, revise a business issue for discussion and propose an initiative. It is the place where experts from different departments can work together apart from their daily work and experiment with new technologies by testing and reviewing adoption possibilities. In addition to this, iLab is place where employees may learn, experiment, share knowledge and make mistakes with no worries. We are guided by the idea that it is better to fail at the very beginning rather than working around a long-term project, and understanding finally that there is not much effect on business application or use-case. Sometimes it hurts project managers to stop implementation of the project when major milestones are passed but everyone realizes that project will not bring the proposed result or efficiency.

Our targets in creating iLab were to set up the ambition level to climb technologically in the midterm and raise supervisors’ IT literacy to meet the future challenges and requirements of automated supervision, automated licensing process, automatic risk management. To promote open culture, teamworking after FCMC’s reorganization and to encourage usage of data technologies in daily operations were among iLab goals, too. Of course, iLab is the right place to validate ideas, work on innovations, get proof of concept or fail fast. The iLab became a homeplace or internal sandbox for the implementation of our RegTech and SupTech strategies.

How did we start?

Everyone in the organization was called to elaborate with ideas for the first iLab sprint. Major requirement for the idea application was exclusion of any connection to already running projects or “well-known problem with well-known solution”. Employees were voting for new technologies that have not been applied before, but will have an impact in the upcoming period, and are closely related to the business objectives and supervision process. Cloud analytics, speech to text, deep fake, natural language processing, blockchain were on our short-list.

Depending on the organizational culture and structure, there are different channels for ideas to come from: directly from C-level managers, business owners, experts, or employees in specialist roles. Generally, the more horizontal is the organizational structure and the more opened is a climate, the more channels for ideas will be represented. Despite the fact that in the FCMC’s case 90% of ideas came from the employees and experts, we still need to put substantial efforts to promote the innovative way of thinking.

Setting up the objectives

Any innovative objective must be clearly aligned with business targets and strategy. In taking the decisions about innovation, it is important to evaluate long-term goals and foresee future trends in technology. Our horizon for RegTech & SupTech strategy is five years. Please note that any changes in IT solutions bring changes in human skills, competences and behaviour. The complexity of supervision and compliance methods are increasing together with the volume of data (structured and unstructured). Moreover, data is becoming more detailed, supervision methods more complicated, so more targeted technological tools are required to process it in order to reduce systemic risks. In addition, high level of automation of our internal systems is required to reduce human errors and to improve productivity within limited resources.

Today’s tech map is full of disruptive solutions with benefits, risks and opportunities in the financial sector. Entering industry 4.0. it became natural using API, blockchains, peer to peer lending, big data, financial platforms, and plenty of apps helping people to manage personal finance with AI-based robo-advisors and get more customized services. Huge investments are made in startups across the European Union that are raising or failing in fight for customers. The financial sector still is a primary ground among other sectors for adapting new technologies and innovations.

A decade ago, IT companies and large commercial banks were major engines for development of financial services mainly due to large budgets and available resources. Now we see plenty of new market players calling themselves FinTech, RegTech, InsurTech, DeepTech, HealthTech, WhateverTech companies successfully raising money, disrupting markets, cross border acquiring customers at lowest costs in the most efficient way. In addition, new tech niches (like SaaS, BaaS), appeared in the financial sector delivering infrastructure and helping other companies to accelerate business processes. Perfect sample of tech companies solving specific issues in the most convenient and digitalized way are RegTechs that provide automatic AML scoring solutions. AI based reputational checks, digital KYC process are widely used by banks, insurance companies and other FinTechs. In June 2021, one of such companies, which is planning to provide AML transaction monitoring services to the financial institutions, successfully completed tests in the FCMC Sandbox.

How did FCMC’s iLab work?

Three teams in three sprints and in three months were able to learn, perform and deliver. As a result of voting, cloud analytics and speech-to-text technologies were selected for iLab, as they leave a significant impact on supervision activities. Specific roles have been assigned to each team member such as: master user, go-searcher, idea generator, business owner, architect, to cover major functions.

From the very beginning, we agreed that 90 days shall be enough to explore the technology side, prove the use cases, and deliver a minimal valuable product (MVP). Any innovative initiative or project shall be limited by dedicated timeframe: from an idea to prototyping. Either the team brings the result or fail, but following the timeframe is important. Between the sprints, we have arranged the experience sharing sessions between the teams; it helped to narrow the MVP and validate the ideas with users. During the validation stages the teams were looking for application coverage across the organization’s supervision functions and evaluating the efficiency in terms of data usage.

One has to know – it does not matter how big is the idea, you need to limit the deliverables or MVP. Start with small. The speed of the implementation is crucial. It is one of the success elements launching a startup. Startups are operating with small budgets at early stages and have only one chance to shoot. It is different in large organizations – they have special dedicated teams focusing on innovations, on new technologies, new approaches. They are not involved into daily operations but are separated to a special unit or laboratory. If the organization could not afford a budget for dedicated unit to work on innovations, it doesn’t mean that it cannot work with innovations at all. Even a small company may release 15% of existing resources of talented people to start working with an idea without huge investments at initial stage, deliver MVP and be productive.

To ensure inspiration and healthy creativity level, it is interesting to explore how similar technologies are used by other companies or similar functions are performed in other industries. For this purpose, for each sprint we have invited external experts from other organizations to iLab to share knowledge on the possibility of technologies’ applications for different needs. We also had an opportunity to dive into design thinking basics and look to our processes through the customer journeys. Interviewing other colleagues – internal users and always asking “why” helped us to rethink, what exactly we deliver.

Innovation is the result of organizational capabilities, culture, structure and knowledge. There should be room for creativity, social interactions and competence sharing. This approach creates learning and knowledge value. It was exactly what happened at the end of all sprints: one of the team has successfully delivered prototype, while two other teams delivered digitalized cloud-based MPV, in form of automatically created up-to-date ID card – customer profile of financial market participant, sourcing the external and internal analytical data, as well as other relevant information from reports and supervision systems. Data analytics allows to find interconnections that are not visible to a human from the first sight, and extrapolate predictions of key indicators, risk concentration, profitability projections, changes in credit portfolio structures and non-performing loan dynamics, impact of provisions on capital.

By delivering of prototypes, we have realized, how many immense opportunities the chosen technologies may give us, and how many new solutions we could implement in addition to the MVP.

Lessons we learned

Innovation is not about a failure or success, but it is about the process and culture. Working with innovation applies leadership and specific approach. According to the FCMC survey Latvian financial sector’s market participants have identified two major obstacles that create barriers in adoption of new technologies: the lack of specialists’ qualifications and limited IT resources, surprisingly – budget is not an issue. There should be no barriers for innovations like organizational bureaucracy, hard structures, lack of communication, traditional way of doing things.

The organizational structure leaves an impact on culture: the simpler is the structure of organization the more entrepreneurial innovations it may produce. Flat structures are adapting to changes quickly like startups. Low autonomy in the organization with several managerial levels and high impact centralized control restricts introduction of any innovation. To develop innovative capabilities, as much as possible minimize extended approvals, hard hierarchy, restrained discipline. And later you will gain from market completeness and profitability.

Challenge we met besides the remote way of working, dealt with maintenance of energy level and splitting resources between iLab projects and “business as usual”. It is a temptation to invest more time and resources into existing ongoing projects with high priority, although innovation is an opportunity to increase the efficiency of the organization on next level.

Last three months of iLab experience have resulted in the FCMC’s 10 golden tips of adapting the innovations:

1. Set up goals for innovations that match your long-term strategy.
2. Break any bureaucracy, minimize hierarchy levels in the organization and involve most talented employees from different functional areas.
3. Set up special rules, just a few and keep it simple.
4. Timeframe, MVP, ownership is the must!
5. Create a workshop or internal Lab. If you cannot afford to hire dedicated innovative team or established Lab, you may release specific time free from daily routine, allowing people to work on their own ideas.
6. Allow to fail fast with no critics; this will contribute to experimental climate and pace for innovations.
7. The idea shall cover something meaningful to people to work on. Let them brainstorm, experiment, involve customers and validate ideas.
8. Improve communication within the organization.
9. Hire best innovative people and encourage them. You will quickly recognize people with innovative mindset who could bring more value to the organization.
10. And – yes, you can do it remotely as we did!

Thanks to iLab we understood what we need to work on: we have not yet come where we should be, but we are not where we were before.

This material has been prepared using speech to text recognition tool ;).