Snippet: After the 2008 financial crisis, banks were suddenly faced with a significant increase in regulations. This meant a hefty rise in expenditure and use of resources, and yet many businesses still fell short of expectations. The process needed access to more meaningful data and digitization.

After the 2008 financial crisis, banks were suddenly faced with a significant increase in regulations. This meant a hefty rise in expenditure and use of resources, and yet many businesses still fell short of expectations. The process needed access to more meaningful data and digitization.

Fortuitously, advances in technology at the time meant that this issue could be readily addressed, giving rise to the regtech industry, or regulatory technology. Using technology to manage regulatory issues is not a new concept, but the industry has developed rapidly in recent years in response to heavy regulatory burdens, greater focus on data and reporting, and advances in software.

These days, financial institutions are burdened with a staggering number of regulations. According to Boston Consulting Group, banks must monitor a global volume of 200 regulatory revisions a day! The cost of this is enormous – even without considering the significant fines that are issued for non-compliance. Since 2009, the financial penalties for non-compliance have accrued to $345 billion, says Boston Consulting. In the 2017 financial year, the US Securities and Exchange Commission (SEC) issued 754 enforcement actions and returned $1.07 billion to affected investorsThomson Reuters reports that over one-third of financial firms spend at least one day each week tracking and analyzing regulatory changes.

The regulatory onslaught is only set to intensify, industry analysts believe. Advisory group Duff & Phelps says that financial institutions’ current compliance expenditures amount to about 4% of their revenues; by 2022, however, this percentage could reach 10%.

Regtech to the rescue

As the number of regulations and the cost of compliance continue to spiral, many financial institutions are turning to regtech solutions for help. Using technologies such as cloud computing, blockchain, big data, artificial intelligence (AI), biometrics, machine learning, and APIs – to name a few – regtech’s innovative and agile solutions help banks meet regulatory requirements more effectively and efficiently by automating many of the repetitive tasks necessitated by compliance requirements. In this way, it can reduce the cost of compliance significantly.

As described in one of our previous blog posts, regtech can be used not only for compliance. Accounting giant Deloitte says that regtech solutions fall into five broad categories:

  1. Compliance – enabling real-time monitoring and tracking of current and upcoming regulatory requirements
  2. Risk management – identifying compliance and regulatory risks, assessing risk exposure, and predicting future threats
  3. Identity management and control – facilitating counterparty due diligence and know your customer (KYC) procedures, while also augmenting anti money laundering, and anti-fraud screening and detection capabilities
  4. Regulatory reporting – enabling more automation and real-time reporting to regulators
  5. Transaction monitoring – monitoring transactions in real time and providing auditing capabilities

Regtech, Deloitte notes, delivers multiple benefits, including speed, agility, integration, and analytics capabilities. The overarching aim is to increase the effectiveness and efficiency of compliance. Effective regtech solutions can dramatically reduce the financial burden of compliance, thereby increasing revenue. An additional advantage is that usually, the solutions are easily integrated into existing legacy systems.

Regtech as part of a digital strategy

Regtech not only digitizes manual processes for better compliance, but also enables a full customer view by integrating data, applications, and business units, for example. It improves customer service – especially through faster customer onboarding, for which regtech can automate labor-intensive processes associated with documentation, contract signature management, KYC, and more. BAI estimates that onboarding time and costs can be reduced by approximately 70% “by unifying regtech within the institution’s overarching onboarding and digital transformation strategy.” Faster time to transact, BAI notes, means faster time to revenue.

Regtech can bring clarity and efficiency into the interpretation of regulation, compliance management, and automated reporting. Its use of cognitive technologies and enhanced analytics is helping the financial industry to quickly understand not only a regulation’s explicit meaning, but also its subtler implications. Moreover, these solutions can scale and adjust as new regulations emerge.

With all these advantages, early adopters of regtech will have a competitive edge over their slower peers. Banks are catching on to this: their spending on regtech is expected to reach $76 billion by 2022, Juniper Research predicts, up from $10.6 billion in 2017. In the long term, regtech solutions will result in a far more transparent financial system, which benefits the industry overall and makes another global financial crisis less likely.

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Entersekt editor

Entersekt editor

An avid consumer of anything to do with tech, Editor (or Ed, for short) treats every piece of writing that crosses his desk as if it were his own. Fluent in nine languages, Ed’s skills are in high demand at Entersekt. When he’s not perfecting his colleagues’ work by day, he can be found blogging in his personal capacity at night.

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