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Author: Jai Manral |11/27/17

Why RegTech is the next big thing in Financial Sector?

In the current financial sector, two prominent pressure points faced by whole industry are:

  1. The ongoing regulatory costs and substantial non-compliance fines and penalties levied by regulators on the expensive side.
  2. The competition from FinTech companies growing their footholds in the revenue stream of established players on the revenue side.

Financial sector is one of the highly regulated sectors with ever-changing regulatory requirements. Regulatory compliance is an expensive, inefficient and complex process in its present state. However, there is a breed of new technological solutions that has caught the attention of firms, regulators and technology providers to drive down the compliance cost, bring in the process efficiency and simplify the compliance process. RegTech or Regulatory Technology can simply be described as utilizing the power of Information Technology for regulatory compliance solutions.

Exponential rise in the cost of regulatory obligations, compiling and types of reporting using large volumes of data generated from various processes and increased volume, offers an exciting opportunity for automation of compliance and monitoring process. This can offer financial incentives in terms of efficient reporting and compliance systems to early industry adopters. And for regulators, easy monitoring and management of data at gradual levels will boost the overall market supervision. These factors will serve as effectual factors in driving the development of RegTech.

Applications of RegTech:

RegTech is often considered as a (or mistaken to be a) mere process efficiency tool. But, when viewed holistically, it can offer real time insights in regulatory compliance, provide intelligence to detect and solve the problems in advance. RegTech’s applications cater to a wide array of contexts. These include monitoring corporation for environmental compliance, or in the insurance or banking domain by utilizing the power of NLP with Machine Learning to interpret regulations and then convert them to business rules for compliance. Some of the viable areas for RegTech solutions are in:

  • Regulatory Compliance Automation, where RegTech platforms can be employed to interpret regulations, its changes and impacts to the current business workflows.
  • Fraud prevention, where real time transaction monitoring can weed out any inconsistent transitional behavior.

Regulatory reporting

Regulatory Reporting is a promising area where custom-made compliance risk reports can be provided on demand, by gathering data from disparate sources, utilizing big data analytics and cloud storage, and the use of AI to analyze the information inline to regulatory requirements.

Risk Management

In Risk Management, the use of predictive analytics where a large chunk of data can be harnessed to forecast operational and regulatory risk specific to that firm. Further, it can be used for the root cause analysis of prior regulatory breaches and hence, can be applied to predict probable risk areas and upcoming disruptive events in the financial sector.

Identity Management

In case of Identity Management, customer identity using KYC utility is paramount. Due diligent tools which can use AI and Machine Learning to analyze customer information through various data sources, both structured and unstructured, can be used for customer on-boarding due diligence, and for compliance on Anti-Money Laundering and Anti-Fraud screening and detection.

The paradigm shift for RegTech will be from automating mundane process, such as compliance reporting, thus benefiting the industry in reducing operational cost in the beginning to be the potent technology in empowering compliance management within industry. RegTech solutions help to predict and identify risk, and to make informed decisions to mitigate and manage those risks.

The key trait of the success of RegTech solutions will depend on it being flexible enough to expand and change as the dynamic nature of regulations and compliance, and by making complex processes into simpler standardized processes, eliminating duplicates and keeping the information secure in case of identity management services. What are your thoughts about this emerging technology?

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