Regulatory compliance has always been and will always be one of the top priorities and concerns of every financial institution (FI). Regulatory reforms following the global financial crisis of 2008 compelled FIs to make substantial investments in risk and compliance – both in terms of technology and headcount – to prevent and remediate regulatory issues. Despite their best efforts, FIs often find themselves falling short of regulatory obligations owing to highly manual processes and silo-based solutions which hinder transparency, efficiency and availability of fast and meaningful data. Non-compliance means being slapped with hefty penalties not to mention consequent reputational damage.
Compliance processes today need to be backed up like never before by automation, artificial intelligence and big data – to name a few crucial technologies – to keep up with increasing regulation and stricter enforcement. For FIs, does this mean the onerous task of replacing legacy compliance technology with myriad new technologies involving heavy financial burden and overlong implementation period? Most likely not.
With Financial Conduct Authority (FCA), the UK regulator, acting as torchbearer for global regulators in promoting innovation in the field of compliance, regtech – short for regulation technology – a subset or an offshoot of fintech industry, is fast gaining currency by transforming how FIs can tackle compliance in a swift, comprehensive and less expensive manner. Simply put, a regtech firm is a fintech company which focuses exclusively on compliance.
The USP of regtech
FIs hitherto had two choices – either to build a customised in-house compliance solution which is an expensive and time-taking exercise or to opt for a reputed external vendor who may or may not support the organization’s specific customization needs. Only large organizations could afford the former but qualified compliance tech-staff were sparse. More often than not, majority opted for off-the shelf solutions which had their own shortcomings such as being heterogeneous to organization’s IT architecture, costly but unsatisfactory customization and continued dependency for tech-support. Occasional tweaks needed as and when regulatory requirements changed involved heavy additional costs and uncertain implementation period.
The USP of regtech firms is the combination of economy and flexibility they bring to table. Since delivered via Pay-As-You-Go (PAYG) cloud solutions, regtech is economical for both service providers and clients. Cloud technology cuts down implementation time and maintenance costs, facilitates remote maintenance with minimum or no system downtime while securing confidential financial data through encryption and regular remote backup.
Switching to regtech solutions does not require a complete overhaul of legacy compliance systems for FIs. Regtech has the ability to extract relevant regulatory data from existing compliance platform without the financial burden of replacement. The data so extracted can be processed, cleansed and manipulated in a timely manner by robust analytics to ensure accurate, consistent, configurable and secure reporting. Compliance gets all the more cumbersome for global firms as they are subject to multiple jurisdictions and country-specific regulation. Regtech solutions have the ability to track data and perform internal audits by region and country without having to deploy separate country-specific solutions. Many have inbuilt horizon scanning capabilities to keep track of changes in regulation.
Built on cutting edge agile technologies with a quick turnaround time, regtech solutions are adaptable and scalable to keep pace with fast changing regulatory and financial reporting needs, a feature conspicuously absent in rigid legacy infrastructure. Their speed and flexibility effectively reduce the costs associated with over long implementation by traditional vendors.
What gives regtech an edge is that it is not just one technology; it is a suite of solutions supported by an armory of latest innovative technologies so that FIs don’t have to worry about deploying separate modules for each compliance process.
Big data tools separate wheat from chaff and serve only the most pertinent smart data after analyzing immense volumes of intricate, inconsistent and unstructured data such as emails, chats, telephone conversations and social media posts in a timely and effective manner. Its predictive analytics can detect suspicious customer or employee behavior.
Artificial intelligence (AI) empowers regtech to eliminate error prone manual processes involving extensive quantitative analysis, financial risk modeling and forecasting which is very crucial for FIs to maintain capital adequacy ratios. AI can sift through millions of transactions, analyze humongous data in mere seconds to detect nonlinear patterns which can lead to market abuse and alert about a possible financial crime before it happens.
Though it’s still at a nascent stage, blockchain distributed ledger technology can meticulously trace back the origin and entire history of financial transactions to establish ownership of financial assets. It helps detect and completely eliminate duplicate financial transactions and curb money laundering. Coupled with biometrics technology, it can vouch for customer credentials and promote customer onboarding to serve unbanked population.
Where’s regtech most useful
Regtech solutions are especially effective in real-time transaction monitoring including customer calls, chat and browsing, electronic Know-your-customer (KYC), customer identity verification, risk modeling and detecting possible market manipulation, suspicious transactions which ultimately lead to money laundering. They facilitate compliance gap analysis by performing periodic health checks and audits. They specialize in various forms of reporting such as transaction, regulatory, management and financial reporting.
Another plus in favor of regtech is improved customer experience in the sense that strong customer authentication and fraud detection mechanism will reduce transaction time since they won’t have to go through multiple steps to prove their identity. Nothing boosts customer confidence in their bank than transparency, clean reputation and being on the right side of regulators.
Regtech enables FIs to focus on their primary business goals without having to spend a fortune and extended time on compliance. It helps firms meet their reporting obligations and reduce operational risks by automating day-to-day compliance tasks while working together seamlessly with the enterprise governance, risk and control (GRC) platform. It puts the organization in the driver seat by anticipating and mitigating risks instead of just being reactive to compliance violations after the damage is done. Transparency and strict controls are crucial not only for overall organizational compliance health but also because they greatly reduce the odds of another global financial calamity occurring anytime soon.
Near term prognosis
As long as FIs exist so will regulation. Though currently there is lot of ambiguity around regulation for fintech segment, sooner than later fintechs companies will also be subject to the same compliance regulations as the incumbents. However, being compact size niche operators, fintechs don’t have the wherewithal to employ a team of compliance experts. With the advent of regtech, they don’t need to. Thus regtech serves the dual purpose of taking care of in-house compliance requirements as well as being a marketable product. Another factor which works for regtech is that they make the job of regulators easy. Regtech is not just for FIs but is also intended to help the regulators with their monitoring job. With FCA already at the forefront other regulators may soon follow suit to encourage regtech to ensure compliance. It means regtech cannot be dismissed as just a buzzword or a fad that come and go. It’s here to stay and evolve.
Despite its far-reaching capabilities, regtech is still a budding sector. It requires partnership of multiple players such as regulators, FIs, technical experts and evangelists, software specialists and entrepreneurial investors to achieve its full potential. It also requires a modicum of coordination among regtech firms, who need to form into an active workgroup with participation from all the aforementioned groups, to come up with standardized designs and solutions that can be used across the industry. Given the amount of work being done in the area, it may not be a surprise if regtech grows apart from the fintech parent and becomes an independent sector by itself.
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