Banks and regulators have faced the daunting task of actively managing and addressing the complexities of regulatory compliance. The ongoing pandemic has added to existing efforts in terms of increased fraudulent activity and various security risks, which has further accelerated and catapulted the adoption of regulatory technology solutions.
Regtech is expected to account for 40% of global compliance spending by 2023. The technology continues to evolve and become cloud-based solutions available as a service, which deliver cost benefits. These solutions also have advanced analytics and machine learning capabilities that can provide meaningful insights on a variety of data sets.
Many financial service providers are investing heavily in legacy technologies, which are not agile and agile enough to respond to stringent, complex and evolving regulatory changes. Regtech has become a preferred option because it can be seamlessly integrated with existing technologies while providing the necessary advantage in terms of managing complexities and timely compliance.
The adoption of regtech is also at the origin of:
Data agility: Most financial services companies have vast amounts of data and rely on a wealth of information that can be obtained from datasets. Cluttered and interlaced datasets can be ungrouped and organized through Regtech solutions.
Analytic: Regtech not only has the capacity to process large volumes of data, but can also perform complex analyzes resulting in huge productivity gains, while providing actionable insights that can drive further efficiency gains.
Increase in crime: The pandemic has led to an increase in money laundering and other fraud-related activities. Regtech solutions with artificial intelligence capabilities can help banks quickly report suspicious activity and complex money laundering cases.
A successful regtech strategy focuses on enterprise level adoption, rather than just having a narrow regtech solution for certain use cases. Banks are constantly faced with new regulations, launching new products and expanding their geographic reach. They must therefore follow an operating model using regtech solutions capable of seamlessly integrating, evolving and also being scalable on a global scale.
While regtech brings a host of potential benefits, it also presents some challenges. Many financial institutions are concerned that they will end up managing multiple niche regtech solutions – this can be addressed by choosing solutions that can be used for multiple use cases. Another major area of concern is that most new regtech solutions are cloud-based, which creates reluctance to share sensitive and confidential data. With advanced security protocols, however, this challenge can also be mitigated to a large extent.
In the area of risk and compliance, there is a plethora of use cases that regtech can seamlessly fit into.
Regulatory reports: Automated and insight-driven reporting using big data, cloud and machine learning
Risk management: Leverage regtech to detect risks and create early warning solutions, powered by advanced scan engines, to assess, mitigate, respond to and anticipate future threats.
Cyber security risk: Cyberattack prevention through a robust cyber risk mechanism powered by a multitude of technologies including AI, Internet of Things (IoT) and the cloud.
Compliance: Regtech can monitor the current state of compliance and create an impact analysis of future regulations on banking processes, data and the technology landscape.
While the above areas are broader for regtech adoption, there are many use cases within each of the areas that present a potential rationale for regtech adoption. Regtech will continue to grow and build on the gains it has made to date and will continue to mature by incorporating the lessons learned so far.
In recent years, there has been a good participation of regulators to encourage the adoption of regtech. In the UK, the Financial Conduct Authority (FCA) heads the Global Financial Innovation Network (GFIN), which acts as a network of regulators to collaborate and share innovation experiences in their respective markets.
Regtech is no longer a buzzword. It is a reality that will continue to evolve and grow in the financial sector with the ever increasing demands of the regulatory world.