The FinTech domain has recently become an integral component of banks and Financial Institutions (FI). FI-FinTech collaborations are especially crucial in handling the vast and ever-increasing burden of regulations in the financial sector. Regulatory changes are being rolled out at a staggering rate in the finance sector. This has driven FI stakeholders to turn to niche technology solutions collectively known as Regulatory Technology (RegTech).
The term FinTech is a portmanteau of the terms 'finance' and 'technology' and the second half has been advancing at breakneck speeds, while regulatory compliance can barely keep up. The tech-driven modernizations in their businesses have resulted in many financial organizations having to struggle with regulatory transformations. RegTech can overcome challenges related to complex litigation, regulations, and regulatory remediation areas while ensuring cost compliance.
In this article, we demystify the term RegTech, while understanding its relevance and need amidst advancements in FinTech. We will then go on to discuss its main benefits in detail.
What Is RegTech And Why Is It Relevant For The Finance Sector?
The technologies implemented by the financial industry to manage regulatory compliances are collectively referred to as RegTech. RegTech may also refer to companies that provide anti-fraud services, risk and asset management, solvency, and regulatory transformations through technology.
The primary functions of RegTech include regulatory monitoring, compliance as well as reporting. According to data compiled by PwC, there are over 600 companies worldwide providing technological compliance for FIs and banks. RegTech has especially gained traction following the implementation of the European Union Parliament's MiFID II legislation in 2018 aimed at providing uniformity among investment services.
Since most of the finance sector's legacy systems for compliance are unable to meet the stringent regulation norms, more FIs are consulting RegTech firms. PwC statistics reveal that about 10-15% of the global workforce is involved with some form of regulatory compliance. The finance sector sees a global expenditure of $270 billion on regulatory compliance. Statistics also reveal that regulatory change between 2008 and 2015 amounted to 492% in terms of global volume, while analysts only spend 10% of their time on the required data analysis to implement organizational compliance.
Finance Sector Challenges Resolved By RegTech
The dedicated system architectures brought by RegTech companies can help better handle uncertainties in financial regulatory compliance. These companies leverage technologies such as artificial intelligence, big data, cloud computing, and machine learning for expediting compliance-related transformations. FIs and banks tend to face a number of challenges in terms of regulatory compliances such as the following:
- Existing regulations go through frequent circulars and modifications that need to be integrated into the financial system architecture.
- FIs without the requisite technology face high overhead costs on production and the deployment of solutions for compliance.
- Additional expenditure also comes from the levy of hefty penalties by regulatory bodies due to non-compliance with regulations.
- Companies that lack sufficient automation and digitization are unable to meet the pace of regulatory changes especially with the constraints of legacy systems.
- FIs with a non-standardized approach and a lack of interoperability between in-house systems also add to their compliance struggles.
The Benefits Of RegTech For FIs
To ensure the proper management of regulation impact and change, it is important to integrate robust FinTech solutions with RegTech innovation. It is RegTech that enables FIs to co-create and scale solutions in frequent partnership with FinTech companies. RegTech offers the following benefits when ensuring regulatory compliance for FIs and banking institutions:
Precision Data Management
Like every other industry, FIs have been witnessing a constant growth in data volume in recent years which necessitates ways to consume structured data. Something as simple as storing Aadhar data in India requires innovative data management strategies. In addition to higher computing power, analyzing high volumes of data requires several levels of governance and regulations.
Banks and FIs need to constantly improve methods to store, access, and process data on ever-increasing scales. These institutions are taking more front-to-back approaches to data infrastructure and there are unprecedented policy initiatives supporting them. Policies such as the Final Transparency Act in the US are pushing towards innovative solutions with RegTech.
Generating Ad hoc Reports
The need for real-time analysis of data related to the functioning of FIs and banks is met by tools brought on board by RegTech firms. Their set of architecture tools and dynamics completely transform the compliance effort. A series of data analysis components such as scenario analysis, regulatory ecosystem analysis, global ad hoc user engagement analysis are handled by these companies. This helps identify risks as and when they arise, turning them into opportunities instead.
Risk Management Analytics
RegTech companies are looking into predictive analytics aimed at providing better alternatives for risk management. With predictive analytics, the root cause of a regulatory error can be assessed before it happens. This can be further used to predict future risk areas and compliance issues that serve as essential bits of information for risk modeling. Advancements in technologies like cloud computing and artificial intelligence can help optimize existing RegTech solutions.
The existing compliance strategies are monitored against upcoming regulations in a process known as compliance intelligence. Solutions formulated by RegTech firms help with regulation reframing and also implementing new governance in finance. These firms identify regulatory risks through data analytics through a risk-based approach and find issues in legacy approaches to risk management. This holistic approach to compliance can help companies in identifying risks before they have an adverse effect on the company's revenue stream.
Reduction In Financial Fraud
Automated credit assessments enabled by RegTech firms help in understanding optimal credit limits and exposure to credit fraud. While ensuring compliance needs, RegTech tools also help deliver cost savings, and increase the return of capital, and also gauge credit fraud. Areas of fraud reduction involve know your customer (KYC), real-time AML screening, and real-time compliance monitoring. As RegTech helps find technological solutions to optimize these processes, more and more banks are appropriating their services.
Optimize Financial Processes With The Right FinTech Solution
RegTech is one of the most sought-after technologies that come under the umbrella domain of FinTech. With the right tech solution, you can minimize financial risk, boost data security and compliance and optimize return on capital. To know how you can drive greater efficiency and productivity in your financial institution's processes, you can discover our series of FinTech Solutions.