Regulatory Technology: Next Wave of Disruption in the Fintech Industry

All this started decades ago when the technology started to prosper and the governments all around the world had to impose certain regulations to keep everything under the law. Every tech company, from a small web agency to a large software production enterprise, today operates under the law of their state. fintech news

Government regulations pass and change more frequently than companies can cope up with them, there is not enough time to shape a process or product to comply with some act. But noncompliance results in sanctions and huge fines.

When it began to happen regularly, the companies had to decide that they needed a separate compliance department. Basically, it was a type of back-office full of lawyers and managers whose work was to monitor and identify the changes in existing regulations and prevent and resolve the issues related to following the regulations.

This marked the invasion of bureaucracy into the world of technology. So the bold investors would first go check if their ‘breaking’ idea confirmed all applicable regulation and only after that they would build it. The expenses are still shocking, according to a report published by Forbes, Fintech companies spent around $100B on regulatory compliance in 2016 and this cost is rising every year.

With regulation in the financial sector changing constantly, banks and financial institutions are under continuous pressure to keep up the pace with the latest rules. Now, a new wave of technology is emerging to enable these companies to make sure they understand the rules and can manage their risks.

The term ‘RegTech’ was forged in the year 2015 by the Financial Conduct Authority, which described it as “a subset of FinTech that concentrates on technologies that might facilitate the delivery of regulatory requirements more effectively and efficiently than existing capabilities”.

As per Deloitte, regulatory technology, or RegTech, is the “new Fintech”, an industry that is undergoing transformation by innovative software. RegTech is providing next-generation solutions to common regulatory problems through agile platforms that quickly and easily integrate  into existing software. Adapting blockchain technology, machine learning, and Artificial Intelligence to the reporting and compliance domain, RegTech companies globally are capturing the attention of venture capital firms and high-profile clientele.

On the one hand, we have plenty of regulations to abide by and on the other hand many companies still don’t have budget for a compliance officer. Regulatory Technology is the happy medium. It is a technology that works to standardize regulatory process, develop unambiguous perception of the regulations and automate the compliance process. Majority of companies still choose to ignore regulations, but do you know fines of GDPR can be up to €20m and 4% of the annual revenue of a company? 

So in simple words we can say that RegTech aims to prevent being fined for not complying to a certain law. Deloitte has evaluated 150 RegTech companies and recognized 5 categories of Regulatory Technology.

Categories of Regulatory Technology

Risk Management:

Some regulatory technology solutions constantly monitor risks. It means they learn to detect potential insecure solutions on the basis of predefined data. In the fintech industry, advanced analytical approaches and big data analysis are used by risk management software to mitigate similar risks and predict market changes. Afterall it is believed that machines are better with numbers when compared to humans. 

Compliance:

Compliance is the area where RegTech plays its biggest role. Machine learning and AI can search for reviewed or new regulations, reports and share the effect of changes with the stockholders. The algorithms are programmed in such a manner that they automatically perform these tasks with compatible reviews at important decision points made by the compliance officer. Installing compliance software would enable you to avoid all those fines imposed by GDPR, as not a single act would be unnoticed.

Identity management: 

The KYC or Know Your Customer process deals with the process of client identity authentication and screening. Mostly manual work, it is subject to  human error which may lead to identity fraud or money laundering. Developers of RegTech depend on advanced data aggregation and analytics tools to expand the scope of the identification process by gathering information from various sources

Regulatory reporting: 

When it comes to developing reports, machines are considered way better then we humans. We make errors and this results in incorrect data or unclear. Robotic Process Automation (RPA) makes data management work without additional employees being involved, so there is timely and accurate data at the end.

Transaction monitoring: 

The process of monitoring financial transactions is generally carried out by a distinct department. They have certain standards regarding what should be considered as suspicious. Again RPA can analyze and monitor transactions faster and more precise than an individual.

Potential benefits of Regulatory Technology

Remain compliant to regulations

RegTech will empower institutions practicing financial services to comply with the regulatory requirements more efficiently and effectively. Deployment of a RegTech system in FinTech will allow them to be proactive to adapt and work with evolving and new regulations. They will also be prepared for ‘what is the situation.’ A RegTech development in a robust FinTech system that can help improve data collection and data analytics, makes it easy to identify the frauds and reduce the time needed for customer onboarding.

Regulations reframing

RegTech system is required to monitor the present state of compliance while comparing it with upcoming regulations. The businesses need cutting-edge technology-powered regulatory systems to plan and execute business processes keeping in view the future regulation. Regulatory Technology solutions enable accurate, fast, end-to-end automated regulatory compliant solutions with flexible, future-proof solutions to easily comply with the standards of today and tomorrow.

Data analytics and decision making

Another crucial area that RegTech addresses in risk management is predictive analytics. In the near future, the technology-based system will enable to assess the issues of a regulatory breach and utilize this to predict compliance issues. The growing innovation happening in cloud computing and AI can increase the usefulness of RegTech solutions.

Simplifies data management and reporting

In recent years, Financial Institutions have witnessed exponential data growth in structured and unstructured formats. Financial Institutions are looking for ways to collect better insights from big data. However, new regulations are pushing banks and financial institutions to take a thorough look at data infrastructure. Empowered by data, industry experts believe RegTech solutions can easily help in strategic data management. It will help in making the regulatory filling more efficient, transparent, and useful for everyone who generates, gathers, and consumes data.

Real-Time reporting

Regulatory Technology has the dynamics to completely change the compliance effort to help in a real-time analysis of the data for financial institutes. Advanced data analytics permits RegTech to analyze in various manners such as scenario analysis, regulatory ecosystem analysis, and real-time user engagement analysis over the globe and thereby, helping organizations to identify risks, issues, and opportunities proactively.

5 working RegTech Solutions

Here I am going to tell you about the Regulatory Technology solutions that are already in the market, so let’s start

• Continuity

Continuity is a company based in the United States that provides regulatory compliance software. The program continually monitors the US Federal Register and, based on the client’s business area, it interprets changes to the regulations that apply to the business of the clients. Rather than hiring additional staff, you can use Continuity. In addition, it offers a Unified Compliance Management System Model, which is an automated compliance process that operates according to a specific schedule.

• Provenir

Provenir is a risk analytics software that incorporates with any organized and instructed data source and creates risk analyses based on preset parameters. Such data sources include Facebook, Twitter, Salesforce and many other tech giants that work with high load databases. This multivariate application can be utilized in different industries, from e-commerce websites to banks.

• IdentityMind

IdentityMind is a platform to take care of the process of your KYC, it searches, maintains and analyzes identities which enable companies to know who a person is to detect and prevent identity fraud. It means better protection from money laundering, for commercial businesses.

• Regis-TR

Regis-TR is a RegTech development company that offers reporting software for all types of trade transactions for different assets in the European Union. Their reporting system adhere to three regulations, FinfraG, EMIR, and SFTR. The company targets to create whole ecosystem where customers shall be able to report their data to one entity at a time and not break any regulations.

• Feedzai

Feedzai is an AI-powered platform to prevent financial violations. Basically, it offers banks and commercial technology companies payment processes protection to detect fraud. It utilizes historical and behavioral data analysis to identify whether a transaction is potentially suspicious or not.

Take away

With the changing regulations for financial and banking institutions, non-compliance is not an option for any business. These institutions are promising clients a high level of security and customer experience that needs a complete transformation of data infrastructure. Regulatory Technology here promises significant control and oversight than ever before. Many new players are entering the market, and I believe that it is a matter of time that RegTech solutions will invade most fintech companies globally. Thus, RegTech is poised for substantial growth.