Regtech is the management of regulatory processes within the financial industry through technology. The main functions of regtech include regulatory monitoring, reporting, and compliance.
Regtech, or RegTech, consists of a group of companies that use cloud computing technology through software-as-a-service (SaaS) to help businesses comply with regulations efficiently and less expensively. Regtech is also known as regulatory technology.
Regtech is a community of tech companies that solve challenges arising from a technology-driven economy through automation. The rise in digital products has increased data breaches, cyber hacks, money laundering, and other fraudulent activities.
RegTech companies are now engaging machine learning, natural language processing, blockchain, AI, and other technologies in order to bring the power of digital transformation to the world of regulatory compliance.
With the use of big data and machine-learning technology, regtech reduces the risk to a company’s compliance department by offering data on money laundering activities conducted online—activities that a traditional compliance team may not be privy to due to the increase of underground marketplaces online.
Regtech tools seek to monitor transactions that take place online in real-time to identify issues or irregularities in the digital payment sphere. Any outlier is relayed to the financial institution to analyze and determine if fraudulent activity is taking place. Institutions that identify potential threats to financial security early on are able to minimize the risks and costs associated with lost funds and data breaches.
Regtech companies collaborate with financial institutions and regulatory bodies, using cloud computing and big data to share information. Cloud computing is a low-cost technology wherein users can share data quickly and securely with other entities.
A bank that receives huge amounts of data may find it too complex, expensive, and time-consuming to comb through. A regtech firm can combine complex information from a bank with data from previous regulatory failures to predict potential risk areas that the bank should focus on. By creating the analytics tools needed for these banks to successfully comply with the regulatory body, the regtech firm saves the bank time and money. The bank also has an effective tool to comply with rules set out by financial authorities.
Types of RegTech
The coming of RegTech is for one primary purpose, and that is to reduce the cost of maintaining regulatory compliance by simply automating its processes. RegTech comes in different types, and they include:
Regulatory Intelligence. This class of RegTech solutions works to update companies about critical regulatory developments. This is vital because new rules and regulations are continuously added, so the need for your software and staff to be aware of the changes is necessary to meet up with compliance.
Risk Management. Solutions targeted at this helps companies to know about gaps in their business processes as well as regulatory pitfalls. Companies that want to avoid any potential problem with regulatory authorities will find these solutions useful.
Customer Identification and AML/KYC. Solutions in this category help businesses to maintain compliance. AML and KYC laws are essential in the RegTech industry, hence the creation of solutions to handle them.
Transaction Monitoring and Reporting. This RegTech category focuses more on AML solutions to oversee transactions and use AI to identify non-compliant transactions.
RegTech Applications and Companies. The application of RegTech broadly covers the financial services sector. Below is a list of its application in various aspects of the industry:
- Enterprise Risk Management: This category is an extensive one because it addresses risks that can harm the entire company and not just a part of it, like fraud risk. Companies in this category are Fenergo and Argos Risk. Fenergo is a platform that helps companies monitor for fraud and also prices end-to-end regulatory onboarding. Argos Risk helps businesses fight identity fraud and to manage credit risk.
- Blockchain / Bitcoin: Since security is a common issue for regulators and market participants concerning the blockchain technology, RegTech companies have been established in this respect to put to rest all worries. Skry is one of such companies, and it monitors blockchain technology and conducts risk assessments. Another company in this space is Elliptic. It is a database that assembles audit-trails of Bitcoin addresses.
- Portfolio Risk Management: Companies that are in this category make it difficult for financial services companies to fall victim to undue risk. Some of the companies that offer the service are nCino, a software for banks which gives access to a range of portfolio management services. Kyriba is yet another company in this space that provides analytics and reporting via a SaaS treasury management tool.
- Operations Risk Management: This category contains companies that make available software with which financial service organizations can manage their daily operational risks. Companies in this category are Rsam and NetGuardians. Rsam provides software that helps in Governance, Risk, and Compliance (GRC). NetGuardians provides risk management software that aids in management, tracking, and incident identification.
- AML / KYC: Companies in this category help keep financial services firms in line with anti-money laundering (AML) requirements. This makes it difficult for criminals to use banks for money laundering activities. Know Your Customer (KYC) tools are used to confirm the identity of personnel or clients. Here are some companies that provide these services: ComplyAdvantage and Trunomi. ComplyAdvantage possesses a comprehensive database of individuals and organizations. It constantly monitors and responds to information concerning financial crime risk. Trunomi is a platform that stores and protects identification information. Also, when such information is required, they can be gotten from the platform.
- Quantitative Analytics: These companies make use of quantitative and analytic modeling to provide financial services firms with tools for liquidity, credit, and market risks. FINCAD and Ayasdi are companies in this category. While FINCAD is a modeling and valuation software provider, Ayasdi is an artificial intelligence and machine learning analytics tool.
- Trade Monitoring: Here, RegTech companies provide software that can keep a close watch on the activities of employees to ensure that they comply with trade restrictions and also not to conduct unauthorized transactions. Examples of these companies are Droit Fintech and OpenGamma. Droit Fintech is an over-the-counter (OTC) derivative trading platform that helps firms to comply with global regulations. OpenGamma ensures that trading activity does not exceed risk management boundaries.
- Tax Management: The companies in this category use software to conduct record-keeping, collect tax revenue and government filings. Avalara, a web-based company, makes tax collection easier by automating it. Canopy Tax is a SaaS-based platform for tax management.
- Reporting: These companies work with both tools and software to blend reporting and data analytics, automate ad-hoc, and regular reporting and maintain information for future use. They include Certent and Capital Confirmation. Certent is an online-based technology that simplifies financial reporting. Capital Confirmation is a well-protected electronic reporting confirmation service used by auditors.
A Brief History of RegTech
The dawn of a new regulatory era
The year was 2008 and the financial world was in chaos. Lehman Brothers had imploded, the federal government took over Fannie and Freddie, and money-market funds broke the buck.
The world was in the throes of the worst financial crisis since the Great Depression.
Since 2008, U.S. banks have been fined a crushing $243 billion. The cost of complying with voluminous, complex, and ever-changing regulations across multiple regulators and jurisdictions effectively amounts to an 8% tax on every firm doing business in the financial space.
For smaller RIAs and broker-dealers, the fixed costs of this regulatory burden has acted like a regressive tax, disproportionately eating a larger portion of their bottom line.
And for global banks, the problem has been different but no less intractable. Forced to compete in an increasingly global marketplace, their regulatory responsibilities have increased exponentially to the point that a small army of compliance analysts, consultants, and lawyers is necessary just to keep up.
In fact, at large financial institutions, the cost of managing legal and regulatory risk averages $10,000 per employee. Managing the complex challenges of MRAs and MOUs can even cost major banks upwards of $1 million apiece.
The Future of RegTech
RegTech uses many cutting-edge technologies such as artificial intelligence, big data, cloud computing, machine learning, to name a few, which ensure companies are more effective in reaching regulatory compliance. RegTech has helped to minimize the risk of human error by automating the processes.
In terms of future trends, it is estimated that spending on RegTech will rise by an average of 48% per annum over the next five years, rising from $10.6 billion in 2017 to $76.3 billion in 2022, according to a report from Juniper Research. Discover how EQS Group can support your company in meeting your regulatory requirements.