RegTech: Redefining Financial Services

Jun 13, 2022

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Money is elusive, and so is the financial peddle. In the words of celebrated investor and banker, Sir John Templeton, the four most crucial expressions of investing are: “This time it’s different.” In all likelihood, deep regulation of financial services stems from this belief. Over the past few years, Financial Institutions (FIs) have coordinated with FinTechs on the varied facets of the business. As the financial industry is built with intricacy and uncertainty, regulations play a key role in driving changes and influencing their pace. Technology once more takes part in easing the bags of risk and compliance officers, by automating the repetitive work they used to do in Excel sheets and legacy systems. Speaking of RegTech, many believe it to be just perhaps a subset of FinTech. But how true is that? Let’s take a deeper look.

An In-Depth Look at RegTech

Regulatory Technology, widely known as RegTech, is the pertinence of the soaring technology to enhance the way businesses govern regulatory compliance. RegTech as a concept brings in three significant elements, namely; People, Data, and Regulations — intended to enable firms in achieving a compliance culture. On a broader note, RegTech powers the amalgamation of these elements to authorize and uplift businesses and their regulations.

The Categories of RegTech

Let’s understand the Regtech landscape with various solutions aligned with the four existing processes;

Regulatory Monitoring: Tools that deliver Regulatory content are in the form of a content library, feed, or resource center. Regulatory content is combined into one platform by content tools, increasing the efficiency of the research and horizon scanning.

Regulatory Obligations: Technology that facilitates regulatory knowledge represents a quantum leap beyond content. In this category, the raw text is transformed into actionable knowledge, including the specific obligations that a company must comply with.

Compliance Management: Regulatory containers include technologies such as GRC (governance, risk, and compliance) platforms and other workflow systems, which contain all of an organization’s regulatory obligations, controls, procedures, and policies. Users can use workflow to track and manage compliance efforts.

Execution of Compliance: Having consolidated the regulatory information into a preferred container, firms can implement additional point solutions either execute a task according to regulations or measure compliance with regulations.

Tech evolution and outpouring of digital products and services has shot-up data breaches, cyber-attacks, tax evasion, and other forged activities. In the light of dealing with these competencies effectively, RegTech solutions have become a requisite. The perfect example of Regtech’s inevitable use is the electronic Know Your Customer (eKYC) process which helps banks verify the identities of the people who open new accounts digitally. KYC is the critical part of the banking regulations process now obsoleting the manual process of checks. With the Regtech, this verification is now digitized, automated, and can be concluded in less than 3 minutes.

Regulation and privacy are talking points for regulators, making RegTech a niche segment within the FinTech ecosystem. Several interesting use cases may be explored by FI-FinTech partnerships in the coming years. Chainalysis is a leading blockchain-based Regtech company mainly concentrating on investigation, compliance, and risk management tools with the foresight to stamp out money laundering, fraud, and compliance violations in the sector of cryptocurrency. It has backed considerable digital payment companies like Gemini, Nets, etc to certify bitcoin transactions and comply with federal regulations. California-based Hummingbird offers an anti-money laundering platform to banks, fintech, lending, and credit companies. Sift is another RegTech using AI, ML, and Big Data to assist organizations to identify fraud, detecting money laundering, and striking out fake accounts.

Mushrooming technologies such as cloud, big data, and machine learning, when harnessed under the umbrella of RegTech, reduce the risk of money laundering through the compliance department.

The Equation

RegTech tools are designed to monitor transactions, that appear online in real-time and potentially identify issues and irregularities that take place in the digital payment space. It is immediately communicated to the financial entity if any type of anomaly is detected to determine if fraud is occurring. When companies identify financial threats at the onset, they can reduce risks and associated shortcomings, such as data breaches and lost funds. To achieve this, RegTech companies work in collaboration with financial institutions and regulatory bodies to leverage the power of cloud computing and big data to share information.

RegTech a Distinct Subset in FinTech

As a subcategory of FinTech, RegTech should be viewed as a separate phenomenon. RegTechs and Fintechs are changing the face of financial institutions and banks; however, it’s important to understand that RegTech has a much broader application and encompasses an even wider range of industry verticals. Money and numerous regulatory requirements are part of every business. As a result, RegTech goes beyond financial services and banking.

Benefits of RegTech

For financial services, Regtech offers enormous benefits:

Effective growth: Advancement of regulations aids technology and compliance authorities to operate placidly and thus uplifts effectiveness and productivity at a far-fetched pace.

Adequate accountability and comprehensiveness: Manual depository processes may forge certain limitations in compliance operations, resulting in human errors and long exposure. Thereby, adopting appropriate technology can mitigate these gaps and streamline compliance.

Substantial internal alignment: Advanced technologies reinforce business by authorizing greater transparency and accountability and hence connecting siloed processes and people. This leads to catering useful insights amongst vast business products and developing a strong thread of compliance.

Enhanced risk management: Through monitoring systems and informing personnel about suspicious activities, Regtech tools could mitigate many types of risks such as market abuse, cyber-attacks, fraud, unseen events, regulatory and legal risks, etc.

Typically, FinTech looks at innovative solutions to bridge the gap between financial service organizations, the largest banks, and the bigger insurance businesses. While RegTech is scrutinizing varied aspects, there are some similar technologies, but the solution differs. According to ResearchAndMarkets.com, the global RegTech market reached a value of US$ 8.7 Billion in 2021. Looking forward, the market is expected to reach US$ 29.2 Billion by 2027. With an increase in the regulatory activity and compliance costs, stakeholders such as investors and venture capital firms are relying on RegTech. By leveraging Regtech, businesses, banks, and insurers can comply with regulations more efficiently and effectively.

Increasing Need for RegTech

Recent years have seen numerous changes and advancements within the financial sector. The changes have resulted in increased partnerships of several financial institutions with fintech companies. Owing to growing pressure from regulators to ensure data compliance and governance, financial companies now pay equal attention to backend aspects, too. A lot of financial services sectors are advancing a transition towards the technology front. A growing number of financial companies today are transforming open API-based technology architectures, which are useful for integrating RegTech. In response to the increase in regulatory activity and compliance costs, investors and venture capital firms are turning to regulatory technology or RegTech. According to experts, the reason for RegTech’s increasing popularity is the fact that financial services are looking forward to leveraging technology innovation.

Due to volatility in the money market, Regtech solutions that are robust and effective are inevitable. Faced with the ever-increasing complexity of regulations, RegTech certainly holds a lot of promise. RegTech solutions are essential to assist FI in complying with regulatory requirements more easily and in a more cost-effective manner due to the complexity of the financial industry and strict legal and regulatory requirements.

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