Regtech’s influence will grow as organizations, particularly in the finance sector, grapple with the growing complexity and pressure of staying compliant.
The regulatory environment is complex and only growing more so. In the scramble to remain compliant with fast-changing laws and the proliferation of big data, regtech is on everyone’s mind. Let’s explore this new technology sector and what it offers to finance the finance industry and beyond.
What is regtech?
The finance industry is under increasing (and expensive) pressure to keep data safe, protect privacy, and monitor for fraud or illegal activity. Regtech applies technologically advanced solutions to the challenge by using software and data to make a company’s pursuit of compliance more complete.
According to Deloitte, true regtech offers the following characteristics to distinguish it from other compliance solutions:
- Agility: Cluttered datasets can be decoupled and organized using ETL methods
- Analytics: Intelligently mining existing big data sources provides deeper analysis for potential risks.
- Integration: The solution is designed to be up and running immediately.
- Speed: Real-time reports and customization ensure timely feedback and the potential to pivot quickly when necessary.
Forbes points to the 2008 credit crisis as the early catalyst for the rise of regtech. In 2015, however, the formation of the Institute of International Finance’s RegTech Working Group solidified its start.
The regtech solution
Regtech’s cloud-based solutions allow a flexible deployment that adapts to business needs. The entire purpose is to disrupt first the fintech space and move to other industries by finally offering a solution that’s capable of reducing the frustration and the risk organizations face in the race to remain compliant.
Some technologies involved in the regtech system include:
- Big data: software must have access to massive data to learn and find connections
- Data visualization: Visualization has so many regtech applications, from modeling risk to delivering insights to stakeholders
- Blockchain: The security benefits of blockchain provide an immutable ledger to ground operations and reduce fraud
- Machine learning: Making smarter evaluations and actively learning industry norms as well as boosting data processing boundaries
- APIs: Any regtech solution must be quickly implementable. APIs offer that swift deployment capability.
Right now, the landscape is seemingly scattered, but looking for a solution can be divided into a few basic categories. Adoption steps can begin with the most pressing need in the organization.
Tools that make the logistics of compliance easier fall under the category of monitoring. An organization needs to see where gaps occur, receive notifications for potential red flags and inconsistencies, and alert to rule changes. These tools compile documentation and report insights.
The next category takes those notifications and documentation to transform them into actionable advice. These offer solutions and specific obligations or steps organizations need to implement.
Regtech also offers workflows called containers that facilitate making compliance adjustments and decisions. They contain all the necessary data, triggers, and software technology so that managers can take care of regulatory responsibilities.
The finance industry is heavily regulated, requiring compliance with multiple agencies and even governments. Regtech promises not just an improvement of the existing system, but a transformation of it through the following benefits:
- Improving flexibility: Current regulatory processes are too rigid for the digital age. Finance institutions operating in Industry 4.0 will find regtech’s deployment a more adaptable solution.
- Simplification: Compliance is full of complexity, but regtech software tools reduce that complexity through automatic mapping of risks, reduce the need for manual checks, and eliminating unnecessary duplication. This is good for both operations and cost.
- Integration-friendly: True regtech tools provide timely integration so that organizations don’t have to wait for compliance insights
- Proactive response: Compliance requires a proactive response, something organizations don’t have the time or insight to accomplish. Regtech shifts the response from reactive to proactive.
In the long term, regtech allows companies the freedom and flexibility to focus on improving customer experiences, innovating new services and solutions, and long-term success planning. It also builds consumer confidence in an era of increased scrutiny for the financial industry.
Where regtech is going
Overall, proponents of regtech hope that it will create a transparent financial system more resistant to potential disruptions. And these effects could ripple outwards to other industries.
Some of the most compelling use cases so far include information-based compliance applications—things like identity verification, regulatory reporting, regulation gap analysis, and health other health checks.
In some cases where no global standard even exists, regtech can fill in gaps and help create a sense of consistency. For example, in the absence of global payment standards, regtech can make spotting fraud easier despite the complexity.
With continuing support from government funding sources, private investment in research and development, and adoption in the industry, regtech has potentially far-reaching impacts. Data is only getting more massive, and the demands on the financial industry to control data become more challenging.
Regtech’s influence will grow as organizations, particularly in the finance sector, grapple with the growing complexity and pressure of staying compliant. The startup world is wide open for new solutions to regulatory challenges, and the results could be a more transparent and more trust from consumers. It promises to disrupt more than just the finance industry and build essential supports to weather disruptions.