RegTech, short for Regulatory Technology, emerges as a solution to staying compliant in the changing regulatory landscape. Learn how this technology shapes industries by helping businesses stay compliant and efficient.
Global regulations are constantly evolving, and financial institutions face a challenging task of complying with these ever-changing rules across different jurisdictions. A failure to comply results in severe penalties and reputational damage. The International Banker reveals that global regulations imposed more than $1.4 billion in fines on banks due to AML violations. How does one ensure seamless adherence in the face of this increasingly complex and changing regulatory environment while maintaining operational agility and flexibility?
In the wake of the 2008 global financial crisis, regulators became much more demanding in their requirements for stricter monitoring standards and timely reporting. The traditional manual process for compliance, which is paper-based, was too slow, expensive, and outdated, prompting the development of technology-driven solutions. RegTech emerged in response to these intensifying regulatory demands post-2008 global financial crisis. Companies are turning to RegTech to keep up with these evolving regulations more effectively and efficiently. This article delves into what RegTech solutions are all about and how they are revolutionizing compliance, from ensuring real-time monitoring to advanced risk management.
What is RegTech?
RegTech, short for Regulatory Technology, is the use of technology to help businesses and companies address compliance and risk management more efficiently. It uses software, artificial intelligence, data analytics, and automation tools to streamline and automate compliance processes, helping companies meet regulatory requirements with greater accuracy. RegTech solutions can provide real-time monitoring, detect fraud, ensure the integrity of secure data, and help businesses adapt to changes in regulations.
The primary purpose of RegTech is to help organizations and businesses handle complex regulations and data reporting smartly, reducing compliance risks. Instead of using the traditional paper-based checks, businesses can use compliance software or artificial intelligence to ensure real-time monitoring, identify potential financial breaches, and report to regulators timely and accurate manner.
RegTech, as a term, was first used by the UK’s Financial Conduct Authority (FCA) in 2015, but the concept predates this. The idea of using technology to ensure real-time compliance was conceived in the 1990s when digital banking was evolving. However, the unprecedented global financial crisis of 2008 served as a major turning point for RegTech, catalyzing the shift to modern compliance and risk mitigation methods. As a result, several startups began developing cutting-edge technological solutions, such as anti-money laundering (AML) and know-your-customer software.
Industries Where RegTech is Deployed
RegTech first gained popularity in the financial industry, where it was used to detect fraud, monitor transactions, and ensure AML compliance. It has since spread to other sectors in need of compliance and risk management. Some of these industries include:
- Insurance: RegTech is used here to manage claims, mitigate fraud, and ensure compliance.
- Healthcare: This innovative technology safeguards patients’ sensitive data in compliance with global health regulations.
- Energy and Utilities: Companies can maintain operational and environmental compliance using RegTech.
- E-commerce: Businesses can use RegTech solutions to monitor transactions and ensure KYC compliance.
Why is RegTech Important?
RegTech offers a multitude of solutions to tackle the compliance and risk management challenges confronting modern businesses. This technology couldn’t have been more useful, especially with financial crime rising exponentially. Below are some key points that explain the importance of RegTech.
-
Increasing complexity of global regulations
Governments and regulators introduce new regulations every now and then to safeguard consumers’ data and financial systems. According to Thomson Reuters’ Cost of Compliance Report, the regulatory landscape had an average of 200 international regulatory changes and announcements captured daily in 2015. Another statistic revealed in the same compliance report says that a new regulatory update emerges every 7 minutes.
Businesses that operate in multiple industries find it complex to navigate overlapping and conflicting requirements. Traditional compliance methods are incapable of keeping up with the sheer volume of today’s evolving regulations. Therefore, businesses and companies must deploy RegTech solutions to quickly help them keep up with the latest requirements to avoid being fined for non-compliance.
-
Rising compliance costs and penalties
Industry reports reveal that global financial institutions and companies spend billions of dollars annually on compliance. Bain & Company disclosed that major banks suffered nearly $210 billion in losses from operational risk between 2011 and 2016. PwC pinpoints that companies spend around $5 million on compliance for every $1 billion in revenue. This figure includes fines that these companies pay for failing to meet anti-money laundering standards.
Adopting RegTech solutions can help companies cut these costs significantly while enhancing compliance and reporting. The money allocated to fines and penalties could be diverted to other probable causes.
-
Need for real-time monitoring and reporting
Traditional compliance methods are slow, time-consuming, and resource-intensive. Plus, they rely on periodic reviews. RegTech software automatically monitors and checks transactions in real-time against the current applicable rules. For example, a financial institution can use RegTech to check if transactions conducted are in line with the revised AML regulations. The AI algorithm in this software can detect patterns in transactions that may indicate suspicious activity and report them immediately.
Businesses can also benefit from RegTech software by preventing and reporting fraudulent activities. They can leverage advanced analytics to check potential rule violations and data anomalies quickly than humans could ever do and report immediately. These help them stay compliant more effectively.
Benefits Over Traditional Compliance Methods
Regulatory Technology has several benefits over traditional compliance methods, including:
-
Automation
Several companies and businesses have lost millions of dollars to financial loss and damages due to poor risk management and internal processes. Worse, they suffered reputational damage. RegTech can help financial institutions identify and respond immediately to potential risks by providing advanced risk management and automatic, continuous monitoring. This means organizations have more time to take preventative measures, which reduces risk exposure.
Furthermore, RegTech can automate and standardize procedures, ensuring precise and error-free operations. RegTech can significantly minimize internal overhead processes and time required for data retrieval and audits.
-
Transparency
Laws are ever-changing, making it difficult for businesses and organizations to stay updated and compliant. With traditional compliance methods, it’s nearly impossible to keep up with new regulations because of how outdated and slow the systems are. RegTech offers a relief in this regard by providing real-time monitoring and updates to new compliance frameworks, ensuring businesses and organizations stay up-to-date.
Furthermore, they can deploy RegTech solutions to track customer activity and ensure each one of them meets regulatory requirements. This establishes trust between customers, regulators, and the company. Clear audit trails simplify adherence to compliance.
-
Speed
In the business and finance world, time is a luxury that they can’t afford. RegTech can help financial institutions and businesses expedite the process of delivering products and services to market by streamlining regulatory processes. This means they can launch new products or services faster while maintaining compliance. Processes that took weeks or even months with traditional systems can be executed in minutes.
-
Cost Savings
Apart from speed and automation, RegTech also saves costs. A company can significantly slash its compliance costs by almost 80% through RegTech implementation. Traditional compliance strategies are costly due to the human labor involved. In industries like finance, where institutions face vast volumes of compliance-based data, traditional systems are ineffective at maintaining accurate reporting and audit.
RegTech’s automation capabilities reduce human errors and time spent on manual tasks. Besides, it also eliminates the need for human labor, reducing overhead expenses significantly. Since RegTech solutions optimize production capacity, human resources can be allocated more efficiently towards tailored, less consumptive tasks.
-
Adaptability
Regulations aren’t static. Traditional systems aren’t adaptable, which makes them obsolete when new rules emerge. RegTech helps organizations adapt to evolving regulations, giving businesses the tools to remain compliant in the face of the ever-changing landscape.
Key Technologies Used in RegTech
Behind RegTech are powerful drivers that help shape the technology, as well as the industry. Below are key technologies powering RegTech:
-
Artificial Intelligence (AI) & Machine Learning
Artificial Intelligence and Machine Learning play significant roles in powering RegTech solutions. While AI is the use of advanced machines to simulate human intelligence processes, ML uses data to make decisions without definite programming. Combined, these technologies can analyze and process large amounts of data, pinpoint patterns, and flag anomalies. The more data they process, the smarter they become, making compliance faster and reporting effective.
-
Big Data & Analytics
Big Data refers to a large amount of datasets that can be analyzed to gain valuable insights. Regulatory compliance usually demands analyzing vast amounts of datasets, which takes time for traditional compliance systems to sift through. Big data analytics can help companies sift through data in real-time to gain insights that can be acted upon immediately. Businesses can generate actionable insights before things escalate.
-
Blockchain
Blockchain technology finds its way into almost everything, thanks to its immutable distributed ledger. It’s fast, secure, and has no single point of failure, making it virtually impenetrable for hackers to access sensitive customer information. Blockchain helps RegTech secure data, verify compliance more effectively, and improve KYC processes. For instance, Blockchain can provide data identities for customers and proof of record of every transaction, making it impeccable for real-time reporting and auditing.
-
Natural Language Processing (NLP)
Natural Language Processing is an emerging trend in the RegTech space that detects fraud in communication mediums and protocols, such as emails and phone calls. What makes this pivotal to RegTech is that it can interpret legal texts and documents, even of up to 100 pages. It then extracts the key points and suggests what action to take, all in minutes. It can identify misconduct and financial crimes immediately.
-
Cloud Computing
Cloud computing allows RegTech companies to store their data in the cloud without significant infrastructure investments. Cloud technology makes data more accessible across global teams and scalable. It is beneficial for multinational businesses.
Common Use Cases of RegTech
RegTech is becoming a practical tool for solving compliance issues across several industries. Some common use cases of RegTech include:
-
Identity verification and KYC (Know Your Customer)
Businesses and financial institutions must ensure that every customer/client is who they claim to be. Otherwise, they are subjecting themselves to fines and penalties. RegTech companies, through Blockchain and AI, can provide advanced digital KYC verification methods to streamline onboarding. This reduces the prevalence of fraud while easing the onboarding journey for customers.
-
Anti-Money Laundering (AML) compliance
AML regulations are amongst the most stringent globally. Failure to incorporate these regulations could put financial institutions and companies into serious legal trouble. Regulatory Technology simplifies compliance processes by constantly monitoring transactions. It leverages cloud computing, big data analytics, and Machine learning to manage customer data and detect any red flags. Accurate reporting ensures the company meets regulatory standards.
-
Risk management and fraud detection
Fraudsters are becoming more intelligent, devising new and sophisticated scam mechanisms that traditional systems are incapable of detecting. RegTech solutions, through machine learning algorithms, detect anomalies in transactions and potential threats, helping businesses address them before they get worse.
-
Regulatory reporting and data management
As explained, manual reporting using traditional systems is error-prone, energy-intensive, and time-consuming. Compliance software, on the other hand, automates data collection through cloud-based solutions. In addition, it provides real-time and accurate reporting. By leveraging RegTech, businesses can stay compliant and reduce administrative burden significantly.
Challenges Facing RegTech Adoption
Embracing RegTech solutions comes with its fair share of hurdles, as not every business or institution is willing to adopt this technology.
-
Data privacy concerns
Businesses constantly rely on customer data for insights on how to scale operations. However, ensuring privacy and security is non-negotiable, as customer data could easily be hacked and exploited. Institutions adopting RegTech must ensure strict adherence to data protection laws, like GDPR.
-
Integration with legacy systems
Many organizations still rely on outdated legacy infrastructure because of the upfront costs and complexities involved in integrating RegTech solutions. Not only does this slow down compliance processes, but it also affects adoption.
-
Regulatory uncertainty
Like it or not, the regulatory landscape is not the same for every jurisdiction. This can complicate long-term investments, especially if the rules continually change. That is, if regulations evolve faster than technology adapts, businesses may be hesitant to go all in.
-
Cost of implementation
RegTech indeed reduces operational costs, but the upfront investment can be big. Additionally, maintenance costs can be significant. Smaller businesses may struggle to allocate a significant budget to integrating compliance software. Even if they manage to do that, maintenance expenses are just as big as the initial setup cost. Software maintenance can gulp up to 70% of the total software costs, and this would need to be sustained continuously as new developments emerge. In the end, the expense of maintaining software can triple the initial development cost.
The Future of RegTech
Regulatory Technology is widely accepted in many financial institutions and businesses, highlighting its importance and growth in ensuring compliance. The industry is rapidly growing due to increasing demands for efficiency and smarter compliance. Analysts predict that the global RegTech market will grow to $60.77 billion by 2030. Others believe that the RegTech industry will reach a projected growth of $66.9 billion by 2032.
The push for greater transparency, efficiency, and scalability among regulators and institutions will shape RegTech and global compliance. Real-time monitoring, analytics, and reporting will soon become prevalent.
Also, there could be increased collaboration between RegTech and regulators. Many regulators may work directly with RegTech companies to deploy compliance software that aligns with current and future rules, reducing the chances of non-compliance for businesses.
Conclusion
For financial institutions and businesses, regulatory compliance has always been a challenge. In today’s regulatory landscape, compliance is more complex due to the ever-changing regulations. RegTech can ease this burden for businesses and financial institutions by helping them comply. They don’t have to worry about updated regulations or new AML/KYC rules. By simply adopting this technology, they gain a competitive edge in compliance and efficiency.
While costs and integration remain a challenge to adoption, automation, efficiency, and scalability make adoption worthwhile. RegTech isn’t only transforming the financial industry – it’s becoming a disruptive force in several industries.
