Regtech: What it is and How it Solves Business Problems

What is RegTech?

Regulatory technology, or RegTech, is a new industry that uses modern information technology to enhance regulatory workflows. RegTech applies modern technologies including artificial intelligence and machine learning to overcome regulatory challenges primarily in financial services. The UK Financial Conduit Authority defines RegTech as “a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities”.

The term is also used to describe the companies that have specialized in this business area. RegTech firms help the bigger companies with their regulatory compliance obligations, improving efficiency, reducing risks and augmenting user experience. With its main application in the financial sector, RegTech is currently expanding into other regulated business as well.

A brief history of RegTech

The global financial crisis in 2008 prompted regulators across the globe to revamped the standards of their oversight of big companies and financial institutions in bid to revive public trust in the financial system. Regulations, such as the Dodd-Frank Financial Reform Act in the US, came in bringing in a sea of change in the regulatory compliance space. Many of the provisions in the new compliance regulations proved cumbersome for financial institutions with their existing compliance workflows. There has been a strong requirement for the use of modern technology such as artificial intelligence, which already brought in radical changes in many industries, and companies started realizing the potential of such technology in the area of regulatory compliance.

RegTech emerged as a separate industry backed by the unprecedented regulatory burden post the global financial crisis. Financial institutions were initially sceptical of the potential of RegTech, particularly the relatively new technologies involved therein. Slowly but steadily, RegTech companies, which received immense support from global investors, managed to develop efficient solutions that can solve real-life regulatory compliance issues, and now have started going mainstream.

Global RegTech Market Size

Today, the RegTech industry is a fast-growing one across the globe. According to a research report by Facts & Factors, the global RegTech market is expected to grow at a CAGR of 21.27% to around US$33.1 Billion by 2026 from about US$5.31 billion in 2019. The report notes that the increasing trends for regulatory sandbox have provided RegTech companies to innovate their solutions further. In addition, the low entry barriers for SaaS-based solutions and the rapid growth in the applications based on artificial intelligence (AI), Machine Learning, and Blockchain would also help the industry.

Global investors pumped in a large sum of money into the RegTech sector recently. Global RegTech investment surged to US$8.5 billion in 2019, compared to US$1.1 billion in 2018, representing a CAGR of 66.7%, according to Fintech Global. The average deal size increased over 3.5x from 2015 to 2019 from just US$7.5m in 2015 to US$26.8m in 2019.

Possibilities with RegTech

In general, RegTech companies focus on speeding up data analytics, improving data quality and generating critical reports for sharing with regulators and using to aid the company’s decision-making process. By using modern technologies, RegTechs completely or partially automate regulatory compliance-related processes. At present, many of these processes are done using traditional techniques that requires huge costs and dedicated staff. By using cutting-edge technologies like Artificial Intelligence, Machine Learning, Big Data, Business Intelligence and Blockchain, RegTechs make regulatory compliance processes efficient and effective.

RegTechs have a large and still growing number of applications. Some of the business cases are given below.

1. Know Your Customer (KYC)

This use case concentrates on compliance with regulations with regard to ensuring adequate knowledge of the customer when they are onboarded and throughout the customer lifecycle. Regulators enforce various KYC procedures to assess customer risk and prevent money laundering risk. By using modern technologies such as machine learning, deep learning and Big Data, RegTech companies can help financial institutions build robust KYC compliance programmes.

Transaction Monitoring

Transaction monitoring is the procedure in which financial institutions scans each and every transaction occurs through their systems for possible financial crime risk. While legacy transaction monitoring solutions, which are rules-based, becoming inefficient and ineffective with a large volume of false positives, new-age RegTech solutions can conduct proper assessment of risk factors and point out those really-risky transactions. Transaction monitoring solutions powered by AI and machine learning can both reduce false alerts to improve process efficiency and identify ‘unknown cases’ or anomalies that legacy systems cannot.

AML screening

AML screening is one of the main pillars of AML compliance. It refers to the process of assessing the risk of existing or potential customers of financial institutions and transactions for possible criminal links. Financial institutions continuously screen their customer names (both individuals and businesses) against watchlists (sanctions lists, PEP lists, adverse media data). In addition, they also do transaction screening to verify customer identities and watch their transactions on an ongoing basis. This will help financial institutions to identify risk in senders and beneficiaries, along with other elements of a transaction.

Compliance risk analysis

Largely meant of managerial purposes, compliance risk analysis is used to gather a detailed view of compliance risk involved in each applicable regulation. It also helps assess the effectiveness of the compliance risk control methods that are currently in use. The process provides a calculated level of residual risk along with recommended corrective actions to reduce perceived risk to an acceptable level.

Data tracking and reconciliation

Data tracking and reconciliation have become challenging tasks for financial institutions due to a number of reasons including increasing process complexity, high transaction volumes, a large number of data sources, ever-changing regulatory requirements and the emergence of new asset types and structured deals. Regulations such as Basel III and MiFID II mandate increased depth and breadth in the reconciliation process. RegTech solutions can unify data from multiple sources and automate data matching and exceptions management to a large extent.

Learn More: Bank Secrecy Act

The Future of Regtech

In general, RegTech solutions are helping business in terms of efficiency gains, better process accuracy, greater internal alignment and improved risk management. The importance of Regtech is being realized by businesses and their adoption is steadily increasing. Meanwhile, RegTech firms are supported by increasing investments into the sector. RegTech companies such as Tookitaki are on the path to create a world where financial institutions can easily comply with regulations, while unlocking business value without compromising consumer experience. Tookitaki offers an anti-money laundering software that can address financial institutions worries on all aspects of AML compliance.

If you want to know more about any of our RegTech solutions aimed at AML compliance and reconciliation management, please contact us.