3rd July 2019

It’s Time to Believe the Hype: RegTech is the New Big Thing

Here’s a trend for you: Find a word in the English dictionary, cut it in half, and then attach the word tech on the end of it. Voilà! There you have it! You have probably created the new “next big thing” in tech. 

Jokes aside, the trend is real. Technology is infiltrating all walks of life and business with no signs of slowing down: FinTech, InsurTech, BioTech and now RegTech. 

The implications of this “marriage” between technology and regulation are multilayered and affect industries across the business spectrum. Let us correct that. They don’t just affect industries, they disrupt them. Before diving into why Regulatory Technology is making waves in business circles, let’s identify what RegTech really is. 

According to a Deloitte report, RegTech is a new breed of technology that delivers “nimble, configurable, easy to integrate, reliable, secure and cost-effective” regulatory solutions. In the same report, RegTech is coined as the “new FinTech” but a more accurate description would be that RegTech is an extension of FinTech. Financial technology has been the “golden child” of this new era of technological development and evolution. Regulation is more of an offspring, a niche that is building on the legacy of FinTech.

What Does RegTech actually Do?

Saying that RegTech combines regulation with technology is both understandable and vague. What does is actually do? Here’s a few buzz words for you: anti-money laundering (AML), know your customer (KYC), due diligence and client on-boarding. In a nutshell, these are the main regulatory vessels affected by technology. 

The aforementioned buzzwords describe the main areas of RegTech touches upon but we want to get a bit more specific. Here are the three main categories affected by RegTech in some more detail.

Compliance

This is probably the biggest area addressed by RegTech. The propositions is simple: a software that automatically updates and incorporates regulatory compliance changes for the business. No manual work, no research about new GDPR laws and most importantly, no fines incurred from compliance oversight. 

RegTech offers businesses the ability to structure, analyze and embed data into their revenue-generating activities. By exploring RegTech solutions to deal with their compliance process, businesses are not only digitizing and streamlining their operations but they are also turning compliance into an asset. 

Compliance has always been viewed as a cost, a necessary evil for companies. Something they all had to do at an extremely high price point. The allure and attractiveness of RegTech is that it does a better job than traditional compliance processes but it also costs less.

The power to process big data in real time, extract relevant information and streamline processes whilst abiding by the letter of the law is the magic potion RegTech is trying to “brew” for businesses around the globe. 

Government and financial regulations change at a faster pace than companies can properly adapt to. RegTech acts as a compliance manager that’s always up-to-date with the latest regulation but also has the ability to automate the compliance process as a whole. 

RegTech

Reporting

Even for the most data driven, number-loving human on the planet, drawing reports month in, month out, can become tedious, dull and monotonous. For a machine though, drawing up reports is literally a piece of cake. One of the easiest and simplest functions of RegTech is regulatory reporting and data management: putting data in an order that makes sense and looks good. The benefits?

It reduces the possibility of error to almost zero and it frees up the time for human resources to put their mind into something more creative, valuable and enjoyable. Accurate reporting gives companies the ability to facilitate the delivery of regulatory requirements to the t. 

Transaction monitoring

Instead of employing an entire department to make sure transactions follow procedure and don’t show signs of illegal activity, all you need is to employ RegTech to do that for you. Machine learning algorithms can oversee transactions in real time and based on the parameters the user enters into the system, flag transactions that do not meet them.

The financial services industry has a lot to gain from this type of risk management process, as transaction monitoring is expensive to both set in place and operate. The true cost of transaction monitoring though comes from the possibility of a mistake. A huge fine is the obvious negative associated with such a scenario but the worst case scenario comes in the form of reputational damage. 

Danske Bank’s 200 billion euro money laundering scandal is a glaring example of what mismanagement of regulatory processes and an overall ability to comply with regulations can lead to. 

A research paper independently conducted by Ponemon Institute LLC reveals that a staggering   $1,089,455 per year is spent on forensics and monitoring purposes. 

The RegTech Landscape

We’ve been talking about what RegTech is and can do but we haven’t given you examples of the companies that make the magic happen. Here are the 10 RegTech companies that are flying the highest in the RegTech universe. 

The word universe was not used by accident. The global RegTech market revenue is expected to reach $7.2 billion by 2023, according to a Thomson Reuters article. The sector is booming and some of the data that are coming on the surface show both progress and promise. 

A Burnmark RegTech survey identifies this progress by saying the following: 

“During the first phase of RegTech, startups focussed more on technology to drive compliance use cases and were less conversant with the nuances of the regulations in a holistic manner. This lack of understanding of regulatory complexities by RegTech startups proved a significant challenge for banks wishing to work with them. RegTech firms in RegTech 2.0 are expected to collaborate more, with banks, regulators and domain experts, to demonstrate their offerings’ success far more quickly.”

This Raconteur World of RegTech infographic beautifully outlines the main benefits of RegTech for financial institutions: 

  • Automation and streamlining 
  • Reducing risk
  • Increasing transparency
  • Cost-cutting
  • Enhanced resilience to cyberthreats
  • Identifying fraud
  • More efficiency
  • Opportunity to grow business
  • Increasing agility 
  • Compliance

As you can see, the stage is set for RegTech to not only grow, but flourish. Businesses need it and the technology seems to be the missing link in their compliance quest. Just like in the case of artificial intelligence, RegTech’s mission is not to abolish or replace compliance teams but become part of them. The combination of experienced compliance professionals with cutting-edge technology that makes their lives easier, seems to be the way to avoid scenarios like the 2008 financial crisis. 

Regulators want more data than ever before, want it at a faster pace and they want it to make sense. RegTech provides the analytical tools necessary to mine, store, structure and analyze this data. As a Refinitiv report clearly denotes, the future of regulation and financial institutions seems to be intertwined: 

“Regtech will be indispensable for firms going forward. Not only will it help cut down the ever-increasing costs of compliance, but it will also provide an edge over competitors who have  yet to invest in technology to maximize efforts in this critical area.”

These thoughts are also echoed by Nirvana Farhadi, the Global Head of Financial Services for Hitachi Vantara in this very interesting interview

Some tech developments arrive on the market and change the way we do things without even asking for them. Think of the iPhone for example. Did it revolutionize mobile technology? Absolutely. Can you claim though, that it’s something we realized we wanted, after we held it in our hands? Yes you can. RegTech is different in the sense that there is a gap in the market and a growing need from the market partakers for a solution to their compliance process.

RegTech is that solution.