Regtech is way more than just a buzzword which it has become. Deloitte in a recent report described regtech has the new fintech and when on to say:
“Regulation is one of a number of services to receive the “tech” treatment in recent times. As with its big brother fintech, regtech will mean different things to different people in this developing area.”
True to the statement regtech indeed is more than the confluence of regulations and technology. As it grows, the solutions and benefits it provides to the financial services industry and fintech, to be more specific, increases manifold.
But in order to understand what makes regtech so important to the fintech trend we need to start with what is regtech, first.
In the simplest form, regtech is as its name implies, a combination of regulations and technology. Going deeper, regtech aids the management of various regulatory processes within the financial industry, using technology.
Regtech companies use cloud computing to host solutions which businesses can use to ensure complete compliance with the ever-changing regulations. Thanks to regtech, businesses can now achieve this feat in much less expensive manner and with higher effectiveness. By using cloud computing as their primary platform, regtech companies can offer their services and solutions in a cost-effective way, which help businesses stay in compliance without spending huge dollar amounts in employing separate compliance teams and tools.
Some of the core characteristics of this disruptive technology in the field of regulation and compliance include:
Regtech is able to process large amounts of complex data with speed using ETL (Extract, Transform, Load) technology and can also mine big data sets using analytic tools, thus generating accurate reports in very short amount of time.
The tech companies that comprise the regtech community help in handling huge volumes of regulation requirements using automation. Regtech companies use big data and machine learning to put this automation into motion. The huge volumes of information and transaction that occur in the financial industry, each day, globally, are combed through using these automated regtech solutions. Regtech companies program their machines to observe and learn from the patterns present in historical data. Machine learning helps apply these patterns and combinations while combing through large pools of data. This helps regtech in identifying cases of fraud, or suspected cases of fraud which otherwise would have been difficult to pinpoint for companies using traditional vetting and compliance techniques.
Regtech companies build and provide the following solutions:
• Regulatory reporting
• Identity management and control
• Transaction monitoring
• Risk management
While these are the solutions regtech companies provide businesses, not all regtech companies provide all the solutions. Businesses need to find out their primary and secondary requirements and find a regtech service provider who specializes in the area they need regulatory assistance with.
For example, if a company wants the services of a regtech company to help in transaction monitoring, hiring one which provides risk management and compliance will not help.
While regulations were set in place to ensure the 2008 sub-prime crisis does not repeat itself and to keep financial frauds like money laundering at bay, the need for fresh regulations which change dynamically increased ever since the arrival of fintech.
Fintech has led to quick transactions, identity vetting processes, increased transparency leading to increased access to information, and much more. The growth in the number of digital financial products and solutions along with the risks they come along with led to the rise in the need of regtech.
Unlike traditional payment models where it was easier to keep track of the money that was being exchanged, digital money is not that easy to track. It is way more fluid and switches wallets real-time which makes it difficult to keep track of, let alone apply regulations and check for compliance issues.
This issue led to a gap in use of digital products (or money) and a check to see if these uses are legitimate or not. Regtech came into being to fill this gap. It was created to monitor, identify, and report irregularities in digital financial platform, thus safeguarding the interests of the legitimate parties in any financial transaction.
The rise in fraudulent activities, cyber security threats and data breaches has further increased the need to ensure stringent regulations in place. The governments of various countries are making continuous changes to their regulatory and compliance policies to ensure safety in cyberspace. For companies, ensuring that their business transactions and activities are always aligned to these regulatory updates and changes is difficult. Also, it seems unfathomable for organizations like banks and other financial institutions that witness large volumes of financial transactions every day, to go through each transaction to check for irregularities in compliance.
Regtech tools and solutions help identify these irregularities early on thus helping the financial institutions in identifying, analysing, and taking necessary measures to address the fraudulent activities that could take place. This assists companies and financial institutions in minimising the costs, losses, and risks that are generally associated with data breaches and funds lost, thus.
Regtech companies work alongside with regulatory bodies and financial institutions. They use cloud computing, which is a cost-effective SaaS to share data quickly, easily, and securely.
For example, fintech provides financial institutions like banks, tools that helps them churn multiple loan applications at the same time using analytics and advanced algorithms. These tools help them identify which applications are eligible for loans and which are clearly going to default.
Regtech on the other hand, runs through the big data that banks are privy to, to identify from previous data, cases of regulatory failure which could help predict potentially risky cases that the bank should look into. Banks and financial institutions are required to be in complete and total compliance all the time due to the huge amount of private data and monetary risk that they handle. A single security breach or threat can spell huge losses not just for them but for their stakeholders as well. This is what regulatory bodies want to ensure never happens. Regtech firms take account of the continuous changes in regulations and integrate the same into their solutions. Staying constantly updated and running is key to their efficient performance.
This is just the beginning of the regtech revolution. The technology started gaining traction just a few years ago in 2015 and is still at its budding stage. As more companies levitate towards fintech, they will find that regtech is simply indispensable to their regulatory and compliances processes. The market is open to be explored by regtech firms and their opportunities, unlimited. Smart nations like Singapore that have played an important role in the growth and expansion of the fintech industry is now going to extend the same support to allow regtech to grow and expand as well. There are 333 regtech firms, globally. It is only a matter of time till more regtech companies come up along with new regulatory solutions to help boost the growth of fintech further.