The latest buzzword in the technology landscape is RegTech. Despite being a subset of Fintech, Regtech is already carving out a distinct identity for itself. Undoubtedly, it has disrupted the regulatory sphere by bringing about innovative solutions to daunting compliance challenges.
In this blog, we will delve into the reasons for its explosive growth and its significance to global companies. We will also look at how it works and what benefits it brings to businesses.
What is RegTech?
RegTech, or regulatory technology, is the industry term for any technology that facilitates the admission of regulatory requirements. The use of Regtech is seen by individuals and organisations. It entails monitoring and reporting on regulatory obligations, pertaining compliance levels and preventing violations of compliance regulations.
RegTech has been around for a very long time. However, it didn’t gain popularity until recently. RegTech before 2008 was rendered in “partnership with regulators.”
At the time, it was over-reliant on “quantitative risk management systems.” RegTech 2.0, now, is “beginning to be driven by financial market participants and regulators who are using technology to enhance regulatory compliance and streamline its component processes.”
Why is Regtech a key advantage for businesses?
For companies dabbling in the global economy, regulations, guidelines, and standards are something that they need to live by. Most companies are expected to follow stringent regulations applicable to their respective industries. Failure to comply may lead to loss of business, customer churn, fines and penalties, and legal repercussions.
Businesses follow a set process known as compliance management to address compliance requirements. But as you may already know, global economic and business regulations keep changing, and companies find it hard to keep up. As a result, businesses are resorting to automated supervision and new emerging technologies, which form the RegTech universe.
Compliance is a big deal for any company. Whether it’s a small business or a large conglomerate, regulatory compliance is becoming increasingly crucial around the globe. As technology adoption picks up at a pace like never before, Regtech, in this decade, is expected to play the hero in helping businesses stay compliant. By automating processes, improving efficiency, and reducing costs, RegTech is sure to emerge as the facilitator of the global interoperable economy.
How does it work?
RegTech uses Big Data, Machine Learning, and Artificial Intelligence (AI) to automate regulatory processes, sort and store data, improve efficiency in reporting, and reduce costs. It can offload a big chunk of manual work from your compliance team and make sure that all the relevant information is available at the right place at the right time.
How can I use it?
As an example, let’s say you’re a bank. You have multiple products and services to offer to your clients. Each product or service comes with different sets of rules and regulations that must be followed. These rules may include anti-money laundering laws, Know Your Customer (KYC) processes, Anti-Bribery Laws, etc. In addition, each transaction has its own set of supporting rules, such as local country laws, jurisdiction-specific policies, and free trade policies.
Now, imagine if all these rules were manually managed. That would take a lot of time and effort. Furthermore, cross verifying compliance at such a scale would be a very labour-intensive and time-consuming job, prone to errors.
That’s where RegTech comes into play. With RegTech, you can easily track transactions, monitor compliance, and report violations to regulatory authorities.
Types of RegTech
RegTech is classified into several categories depending on the solution on offer. Most Regtech solutions fall under the categories listed below:
These platforms and solutions keep businesses updated on the latest changes and developments in regulations. Some of the platforms operating in this domain include Freyr Solutions, Clarivate, and Thomson Reuters.
Transaction monitoring and reporting
AML solutions fall under this type. Using artificial intelligence, they identify potentially malignant or non-compliant transactions at a hyperlocal, local or global scale. Platforms in this category include Jumio, Complyadvantage, and Seon.
Risk-oriented regtech highlights potential regulatory hazards and identifies gaps in a company’s processes. Axiomsl, 360factors, and Albany Group are some of the companies providing solutions in this area.
Customer identification and AML/KYC
This category focuses on verifying a potential customer’s identity. It helps businesses comply with AML and KYC regulations. Merchant solutions providing e-commerce platforms often use this category of solutions to ease merchant onboarding. Some of the providers in this space include Accuity, Agreement Express, and Know Your Customer.
What are the benefits of Regulatory Tech?
RegTech is revolutionizing the way we do business today. :
- Automating and streamlining regulatory processes
- Monitoring internal controls and identifying gaps
- Identifying and reducing regulatory risks
- Reducing compliance management costs
- Increasing efficiency and business agility
- Ensuring overall compliance
How is Regulatory Tech transforming Regulatory Compliance?
RegTech solutions help businesses in regulatory compliance by providing manageable solutions for identity management, risk management, and transaction monitoring.
It has disrupted the regulatory landscape by bringing about technology-backed innovative solutions requiring minimal human intervention. After the Global Financial Crisis of 2008, there were some drastic developments in the regulatory landscape, so much so that it has changed the very nature of financial markets, institutions, and services. Considering the cost of lapses in compliance and the complexities involved in navigating the dynamic world of regulatory policies, it’s no surprise that businesses are leveraging the power of RegTech.
In recent years, we’ve seen a dramatic increase in the number of regulations being passed by governments worldwide. And while some of these new rules are focused on consumer protection, others are designed to protect investors and consumers from fraud and abuse. This constant flux in regulatory rules has made regulatory technology an increasingly important part of the compliance process.
Regulatory Tech is Driving Innovation
As regulators continue to pass more laws, they require companies to adopt new technologies to comply with existing regulations. For example, banks in India must now report suspicious activity to authorities within 7 days. But to meet such requirements, banks and businesses need to automate their processes and use data analytics tools to identify patterns of behaviour that indicate fraudulent activity.
Regulatory Tech is making Compliance easier
Companies are using regulatory tech to improve the efficiency of their operations. They’re automating manual tasks, reducing human error, and streamlining processes.
According to Thomson Reuters Regulatory Intelligence 12th annual survey (2021), some of the biggest challenges in compliance are keeping up with regulatory change and lack of skilled resources. RegTech could be the key to solving these problems.
The Growth of RegTech Firms
There are over 300 RegTech firms across the globe offering a diverse range of compliance solutions. Each company offers its own type of compliance solution. Some may specialise in account verification or KYC and AML procedures. At the same time, others may be into risk management or regulatory intelligence.
The tools and solutions that these firms allow companies to automate compliance processes. However, not all the solutions may be the right fit for you. Some of them require a high level of technical expertise, while others may seem to be pricey. Nevertheless, the long term benefits outweigh the cost.
Moreover, companies are leveraging it to streamline their operations and mitigate compliance risks. They’re also using it to improve customer experience.
Why is RegTech becoming more important for compliance in the Financial sector?
The global cost of non-compliance continues to rise. According to a 2020 report by Fenergo, global financial institutions have been hit with $10.4 billion in regulatory fines and penalties related to anti-money laundering (AML), Know Your Customer (KYC), data privacy, and MiFID (Markets in Financial Instruments Directive) regulations in 2020. What’s more alarming is that the total fines paid for these breaches since 2008 come to $46.4 billion!
That’s a high price to pay for lapses in compliance. What’s worse is that such lapses are unintentional and avoidable in most cases.
RBI also curtailed the operations of 44 cooperative banks for banking irregularities.
In the financial year 2018-19, RBI reported that banks lost Rs 71,543 Cr to fraudulent transactions. As a result, the government has been putting a lot of pressure on banks for accurate NPA and compliance reporting.
RegTech is helping the financial services industry address these issues by providing automated solutions that make it easier to detect potential risks and reduce compliance costs.
RegTech has applications in many different sectors. However, it’s been widely adopted and used in the financial industry. The banking sector has been able to effectively comply with complex regulations using this technology in its compliance operation. Here are just a few examples:
Automated Account Verification
Account verification is one of the most common functions performed by RegTech. It helps ensure that customers are who they say they are. This can help prevent money laundering and other illegal activities.
The scope of this exercise includes:
- Customer identification
- Know Your Customer (KYC)
- Document authentication
- Fraud detection
- Automated Account Verification
Know Your Customer (KYC)
KYC checks verify whether the applicant is allowed to open an account based on their information.
Many RegTech platforms offer document authentication features. These features are designed to validate documents submitted by customers. For example, a RegTech platform could check that a driver’s licence matches the photo on file. Or it could compare signatures from different documents. These features are especially useful when multiple documents are required to complete a transaction.
A process by which financial institutions and trade bodies identify deviations in customer behaviour, transaction monitoring is a huge help to international banks, financial regulatory authorities, trading houses, and large companies.
Organisations like India’s SEBI and RBI, the US SEC and the Bank for International Settlements (BIS) depend heavily on transaction monitoring to comply with anti-money laundering policies.
Automated Account Verification
Some RegTech platforms perform automatic account verifications. This means that transactions are verified automatically without human intervention.
This feature is beneficial for large enterprises that handle thousands of transactions per day. It’s also beneficial for smaller businesses that don’t want to invest in additional staff or technology.
Automated Fraud Prevention and Detection
One of the main benefits of RegTech is its ability to identify fraudulent activity. This is done through machine learning algorithms that analyse transaction patterns.
The result? A much better chance of detecting fraud in advance.
Automated Due Diligence
RegTech companies also provide automated due diligence solutions. It involves running comprehensive checks on any target entity and evaluating it against several parameters, including financial health, litigation history, sanctions check, and ESG.
These solutions help companies make informed decisions before getting into a strategic partnership with third parties, vendors, small businesses, or suppliers.
Where we stand today
The adoption of RegTech is emerging as a major trend not only in the financial sector. As businesses across industries continue to face increased regulatory framework within which they have to operate, adopting RegTech is becoming more of a norm than an exception.
The expectations from the RegTech market are high. The increasing number of regulatory requirements that have been mushrooming by the day is likely to drive RegTech’s growth in 2022 and beyond.
What is a RegTech platform?
A RegTech platform is a software solution that automates certain aspects of the financial and regulatory services process. It does this by using artificial intelligence, machine learning, and big data analytics.
How does RegTech differ from FinTech?
FinTech refers to fintech companies that focus on financial products and services. They often create new technologies that are disruptive to existing industries. By contrast, RegTech focuses on improving existing processes within the financial sector and maintaining compliance.
What is the difference between RegTech and SupTech?
SupTech is short for “supervisory technology.” It’s a term used to describe any type of technology that uses big data and AI to help supervisory authorities to automate and improve the efficiency of the supervisory function.
What technologies do RegTech solutions use?
RegTech leverages the latest IT developments like cloud computing, blockchain, big data, and machine learning to provide innovative solutions to complex business problems.