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CUBE answers the big question, “What exactly is… RegTech?”

We ask our in-house experts to do an in-depth examination of one of the most asked questions since 2006!

“What is RegTech” has to be one of the most asked questions since 2006!

Where does the term RegTech originate?

‘RegTech’, a shortening of the phrase ‘Regulatory Technology’, is commonly used to describe the set of technologies utilized to address regulatory challenges. Typically, RegTech provides the tools needed to facilitate governance, mitigate risk, ensure compliance and deliver regulatory reporting. While financial services firms have leveraged technology for regulatory purposes for some time, RegTech terminology first emerged at the end of 2016.

What triggered the birth of RegTech?
Post-2008, the exponential growth of regulatory and information reporting requirements was unprecedented. This upwards spiral of regulation has continued for many years, and shows no sign of abating.

In parallel, the financial services sector began embracing digital transformation. While the burgeoning adoption of digital has been welcomed by customers, contributing to increased revenues and more engaged customer relationships, it has spawned swathes of new regulation designed to prevent data breaches, minimize cyber hacks, prevent money laundering, and mitigate against the risk of a wide variety of other fraudulent activity.

The financial services sector needed new and different ways to increase regulatory awareness and de-risk business operations. The typical approach of throwing people at repetitive tasks like AML and KYC was proving costly and unsustainable. Incumbent technology solutions failed to connect disparate systems and processes, lacked immediacy and (given the rapid growth in data) were simply incapable of delivering accurate analytics and oversight.

What is the “Tech” in RegTech, and how does it differ from pre-existing technology used for regulatory compliance?
RegTech leverages new-age technologies that conjure a variety of dynamic watchwords – responsive, agile, available and accurate, to name just a few.

  • RegTech solutions sit in the cloud, because Software-as-a-Services (SaaS) is the only way to achieve the speed and flexibility required to keep pace with regulatory change, and to contain compliance costs.
  • Data visualization, semantic analysis and deep learning are essential elements, and perhaps the most impactful emerging RegTech pivots around big data analytics and AI (artificial intelligence).
  • Machine learning, natural language processing and other innovative AI tools have transformed the art of the possible into reality.
  • Real-time monitoring for early impact assessment of regulatory change, and the ability to centralize huge volumes of customer data and analyze it for both compliance and customer insights, is a compelling combination.
  • Last, but certainly not least, new-age RegTech binds compliance processes with clever automations, creating interconnections and efficiencies that de-risk the business, increase revenues and cut costs.

Who are the providers of RegTech?

Given the underpinnings of RegTech, and the relative new-ness of the requirement, it is perhaps not surprising to know that the majority of eminent RegTech providers was founded less than eight years ago. For some of the largest banks in the world this has required a step change in their attitude towards procurement – not least flexibility surrounding the legendary “approved suppliers list”, because few (if any) on that historical list can deliver new-age RegTech. But change is gathering pace, due in part to the support of pro-RegTech supervisory agents. RegTech providers with solid solutions, strong track record and resilience are growing fast.

How do regulated financial institutions benefit from RegTech?
Today, more than 600 RegTech solutions exist, yielding benefits across front, middle and back-office compliance processes. Solutions for customer on-boarding, financial crime prevention and detection, and automation of regulatory change management processes, have proved especially popular.

The three big wins from RegTech – delivered smarter, faster, cheaper – are:

  • Risk mitigation – RegTech can mitigate risk by ensuring that the right policies and tools are put in place, that they are applied in accordance with regulatory obligations, that all actions and decisions are recorded in an indisputable audit trail, and that any breaches are identified quickly and remedied immediately. In doing so, financial institutions can significantly reduce the risk of data loss, fraud, enforcement penalties and fines. Digital business can be conducted with heightened confidence in the ability to detect risk quickly, and act appropriately.
  • Cost reduction – RegTech generates vast cost savings through intelligent automation and leaner processes, enabling redeployment of staff to more pro-active work, and greatly reducing the need for outsourced services.
  • Business value – delivered through fast, intelligent processing, throughout the onboarding process for example, or by reducing time to market for firms needing to understand the regulatory implications of launching new products or entering new markets. RegTech also has the capacity to provide deep, intelligent insights that empower financial institutions to make smarter, more informed decisions.
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