RegTech solutions can mitigate risk while aiding regulatory compliance

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Mounting regulatory oversight and today’s technology-inspired open ecosystem are a formidable compliance challenge for banks and payment service providers (PSPs).

While regulations continuously evolve; the costs of non-compliance are skyrocketing. Therefore, to adhere to stringent mandates and norms, banks and PSPs are turning to advanced technological capabilities for support. The result? Regulatory Technology (RegTech) tools, solutions, and firms are gaining mainstream popularity among financial institutions looking to redefine and streamline compliance processes across jurisdictions, lines of business and client bases.

RegTech digital solutions collect intelligence through data analytics, predictive modeling, and statistical tools.[1] This functionality is particularly important when it comes to proactively addressing multiple regulations versus taking a one-at-a-time approach that may result in several remediation measures.

It is no surprise that firms’ RegTech spending is expected to average 48% annual growth over the next five years, expanding from $10.6 billion in 2017 to $76.3 billion in 2022.[2]

RegTech drastically improves the efficiency of compliance-related processes, data aggregation, data analysis, and tailored need-based offerings.

However, to effectively leverage RegTech services, banks and PSPs must seamlessly align and integrate all associated business processes, data systems, and technical architectures.

Although initially considered as a solution for regulatory compliance, RegTech is also demonstrating potential as a risk mitigation tool, primarily because of the relationship between compliance and risk-management functions.

How RegTech Can Be Used to Mitigate Risk

World Insurance Report 2019

Source: Capgemini Financial Services Analysis, 2019

For regulatory and risk purposes, firms must record digital transaction-related data and then store it for a stipulated period. In case of failure, they must provide fact-based evidence or face enormous operational, reputational, and legal risks.

Compliance teams face the daunting task of collecting, archiving, sharing, and analyzing masses of data to reduce the firm’s risk exposure, which is precisely where RegTech support can offer agility and expertise in emerging technologies that span from machine learning to predictive modeling.

RegTech Risk-Mitigation Tools

World Insurance Report 2019

Source: Capgemini Financial Services Analysis, 2019

Regulators are also seeking RegTech assistance in managing industry risks and analyzing large volumes of data and reporting information. Earlier this year the UK’s consumer protection group, Financial Conduct Authority (FCA-UK), requested Digital Regulatory Reporting (DRR) proposals for a proof of concept that could make it easier for firms to meet reporting requirements. An assessment of the technologies used to develop the DRR prototype is expected by the first quarter of 2019.[3]

Regulators may further use RegTech to enhance internal processes and improve how they receive and provide information to those under their supervision. In fact, FCA-UK acted as the observer in a RegTech pilot test on the EU’s Markets in Financial Instruments Directive (MiFID II) conducted by Common Bank of Australia and ING using artificial intelligence for simplifying regulatory information processing.[4]

A recent study in which banks – globally – were analyzed regarding their third-party RegTech implementations found:[5]

  • Globally, banks are embracing RegTech solutions for eKYC (e-know-your-customer) and real-time anti-money laundering screening, AI/ML-based fraud prevention, and real-time compliance monitoring
  • When it came to advanced risk management and end-to-end automated reporting, RegTech solutions earned medium-level adoption from banks, but data management, audit, and governance were less likely to be adopted

Banks are bound to increasingly consider RegTech solutions and partnerships to ease the complexity of compliance and to alleviate risk – which is on the upswing because of the growing popularity of consumer transactions conducted via the web, social media, and digital channels.

San Diego, California-based Silvergate Bank (a community bank known for cryptocurrency exchanges) partnered with London/New York-based blockchain intelligence startup Elliptic to analyze and screen possible fraudulent bitcoin activity. By leveraging the Elliptic platform, Silvergate can identify suspicious actions and reduce risk-assessment costs for potential customers.[6]

RegTech firms such as London-based newcomer AlgoDynamix are developing effective risk management and forecasting tools that are backed by big banks including BBVA and Bank of America Merrill Lynch.

As the industry shifts to a more data-driven and granular approach, financial institutions should also focus on building processes by combining domain expertise, business processes, and technology.

Next-generation RegTech solutions will be influenced by cognitive technology, real-time analytics, and robotics to become transformational frontrunners within the financial regulatory space.

To learn more, feel free to get in touch with me on social media.

[1] RegTech is a term used collectively for firms that offer compliance-related solutions based on emerging technologies

[2] Juniper Research, “Regtech Spending to Exceed $76bn By 2022, As Compliance Costs Soar,” October 24, 2017, https://www.juniperresearch.com/press/press-releases/regtech-spending-to-exceed-$76bn-by-2022

[3] Financial Conduct Authority website, “Call for Input: Using technology to achieve smarter regulatory reporting,” October 17, 2018, https://www.fca.org.uk/publications/feedback-statements/call-input-using-technology-achieve-smarter-regulatory-reporting

[4] Finextra, “CBA and ING Partner on RegTech Pilot,” February 22, 2018, https://www.finextra.com/newsarticle/31721/cba-and-ing-partner-on-regtech-pilot/ai

[5] MEDICI Research, “A Tech-Stitch to Compliance – The RegTech Story,” Diwakar Mandal, June 4, 2018, https://gomedici.com/tech-stitch-to-compliance-regtech-story

[6] EconoTimes, “Elliptic, Silvergate Bank partner to monitor suspicious activity on bitcoin blockchain,” April 20, 2017, https://www.econotimes.com/Elliptic-Silvergate-Bank-partner-to-monitor-suspicious-activity-on-bitcoin-blockchain-652152

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