RegTech Demystified

RegTech, commonly known as regulatory technology, comprises of all technologies designed to assist companies within the financial industry to comply with regulations. Many of the RegTech solutions primarily focus on anti-money laundering (AML) and know your customer (KYC) regulations.

These solutions are designed with high precision levels offered by machine learning technology and artificial intelligence (AI). RegTech solutions cover various functions that include fraud prevention, regulatory change discovery applications, risk management, and KYC. Regulatory changes have increased in volume by almost 500% since the global financial crisis of 2008-09.

That could be the reason why the commercial service companies opted to increase the number of their compliance staff and invest more money in their compliance fund. RegTech strives to partner with compliance departments of various financial service companies to monitor regulatory changes, generate reports, monitor risks, reduce frequencies of any false non-compliance alerts, and supervise infinite transactions.

The task of compliance sustenance proves too expensive for companies. Thus, RegTech stepped in to make the compulsory requirement affordable by implementing artificial intelligence (AI) technology. RegTech applications users are guaranteed access to financial crime identification, risk management, and identity management services. Eventually, RegTech’s primary goal is to make compliance highly affordable.

How it started

The financial industry was severely affected by the 2008 crisis which resulted in more regulations to prevent a repeat of such a crisis in the future. Many technologies designed for the financial sector came up after the crisis ended resulting in the establishment of more FinTech companies.

These companies strive to ensure that customers seamlessly interact with the financial industry. But, the fear of the 2008 financial crisis persisted mostly among legislators who created extreme regulations that in the end hurt the FinTech firms. To stay afloat, the firms resulted in hiring consultants, lawyers, and accountants.

For example, since 2008, US banks have suffered from fines amounting to around $243 billion. Also, companies in the financial industry pay an 8% tax covering compliance costs for the many jurisdictions and regulators in existence.

Business growth is also laden since expansions of any kind come with a price. For a business to expand into a new region, it must be updated on the regulatory needs of the new region. Thus, companies end up hiring expert advisors at exorbitant costs.

In the case of the big financial institutions, managing regulatory and legal risks may cost up to $10,000 per individual. For the major banks, compliance challenges management can cost more than $1 million apiece. Hence, all these legal challenges and regulatory measures made regulatory technology essential.

Types of RegTech

RegTech came in to minimize the cost of maintaining regulatory compliance through automating the process. The technology comes in different types which include:

Regulatory Intelligence

This solution works to update the user companies about critical regulatory developments. It is important since new rules and regulations are constantly added. Thus, a company’s software and staff must be aware of the changes needed to meet up with compliance.

Risk Management

These solutions let the companies know about any gaps in their business operations and other processes and the existence of any regulatory pitfalls. With these solutions available, companies can avoid any potential issues with regulatory authorities.

Transaction Monitoring and Reporting

This category focuses on AML solutions to monitor transactions and use AI to identify and non-compliant transactions.

Customer Identification and AML/KYC

The RegTech solutions in this category assist businesses to maintain compliance. KYC and AML laws are important in the RegTech industry. Thus, they create solutions to handle them.

RegTech Applications and Companies

The application of this technology broadly covers the financial services sector. Here is a list of its applications in different aspects of the industry:

Enterprise Risk Management

This category is broad since it addresses risks that can affect the whole company, like fraud risk. The companies in this category are Argos Risk and Fenergo. The Fenergo platform assists companies to monitor for fraud and the prices end-to-end regulatory onboarding. Argos Risk helps companies fight identity fraud and to manage credit risk.

Bitcoin/Blockchain

Since security is a major issue that affects market participants and regulators in the blockchain technology world, RegTech companies have come up to offer solutions. One such company is Skry which monitors blockchain technology and conducts risk assessments. Elliptic is another company in this space and it acts as a database that assembles audit-traces of Bitcoin addresses.

Portfolio Risk Management

Companies operating in this space ensure that financial services companies do not fall victim to undue risk. Software for banks that provides access to many portfolio management services, nCino, is one of the companies that operate in this category. Kyriba offers analytics and reporting through a SaaS treasury management tool.

Operations Risk Management

In this category, companies make available software that financial service organizations can use to manage their daily operational risks. Rsam and NetGuardians are notable companies offering services in this category. NetGuardians develops risk management software that helps in tracking, management, and incident identification. On the other hand, Rsam develops software for governance, risk, and compliance (GRC).

Quantitative Analytics

These companies use quantitative and analytic modeling to give financial services firms various tools for credit, liquidity, and market risks. Ayasdi and FINCAD are the companies that serve this category. Ayasdi is an AI and machine learning analytics tool while FINCAD is a modeling and valuation software developer.

Tax Management

Companies in this category use software to collect government filings, conduct record-keeping, and collect tax revenue. Canopy Tax is a SaaS-based platform useful for tax management while Avalara is a web-based company that makes tax collection easy through automation.

Trade Monitoring

In this category, RegTech companies offer software that can keep an eye on the activities of the employees to guarantee that they comply with trade restrictions. It also ensures that employees do not execute unauthorized transactions. For instance, OpenGamma guarantees that trading activity does not surpass the set risk management boundaries.

Droit Fintech is an over-the-counter (OTC) derivative trading platform. The platform ensures that firms comply with global regulations.

AML/KYC

Companies that operate in this category assist in keeping financial services firms in line with all the anti-money laundering (AML) requirements. Thus, they make it challenging for criminals to use banks for any type of money laundering activities. The KYC tools are primarily useful in the confirmation of the identity of clients or personnel.

ComplyAdvantage Company has an extensive database of individuals and organizations. It continuously monitors and responds to information that mainly concerns financial crime risk. Trunomi is a platform that offers services in this category. This platform stores and protects all identification information. Furthermore, whenever such information is needed, it can be sourced from the platform.

Reporting

The companies in this category work with both software and tools to blend data analytics and reporting. The blending also aims to automate ad-hoc, support regular reporting, and maintain information for future use. The main players in this category are Capital Confirmation and Certent. Capital Confirmation, a highly protected electronic reporting confirmation service, is used by auditors. Certent, an online-based technology, simplifies financial reporting.

The Outlook

RegTech adopts the best technologies in its service delivery including artificial intelligence, cloud computing, machine learning, and much more. This technology is designed to ensure that no company will ever encounter challenges when dealing with regulatory authorities due to compliance.

RegTech has eliminated the human error factor from all the compliance processes through automation. Data from various studies show that there is a suitable future for this technology. Furthermore, experts predict that in the next five years RegTech investments will surge by 48%. It will represent an increase from the 2017 record of $10.6 billion to $76.3 billion come 2022.

No company in the financial services industry can operate without RegTech if they aim to have a profitable venture. This technology will enable companies to save more money and simultaneously keep up with the latest in regulatory changes. By doing that, the companies can know what is needed of them and comply accordingly.