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RegTech

Regulatory Technology emerged as a result of the increasing regulatory requirements after the financial crisis of 2008. Sum of post-crisis fines has topped $200 billion worldwide and 87% of banking CEOs think that regulatory obligations are a great source of disruption. This is exactly the problem RegTech is aiming to solve. It is a term used to describe the use of modern technology to facilitate compliance with the regulations. RegTech companies differ in services they provide, but the main idea is that all of them use technology to make certain processes associated with regulatory compliance easier. RegTech is especially important for FinTech companies, who offer online financial services and might need additional processes to meet data privacy requirements and conduct customer due diligence.

Darktrace

Darktrace

Headquarters

San Fransisco

Company size

Large

Year founded

2013

Core product

Regtech

Darktrace helps its customers detect cyber threats in real time.

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Governance.com

Governance.com

Headquarters

Luxembourg

Company size

Small

Year founded

2017

Core product

Regtech

Governance.com uses modern technology to facilitate regulatory compliance for its clients.

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AQmetrics

AQmetrics

Headquarters

Kildare

Company size

Small

Year founded

2012

Core product

Regtech

AQmetrics offers risk analytics and regulatory reporting services.

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ClauseMatch

ClauseMatch

Headquarters

London

Company size

Small

Year founded

2012

Core product

Risk & Compliance

ClauseMatch uses machine learning technology to facilitate regulatory compliance.

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Onfido

Onfido

Headquarters

London, England

Company size

Medium

Year founded

2012

Core product

Regtech

Onfido enables customers to verify users' identities remotely.

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Railsbank

Railsbank

Headquarters

London

Company size

Small

Year founded

2015

Core product

Regtech

Railsbank allows businesses to access banking capabilities through its APIs.

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ComplyAdvantage

ComplyAdvantage

Headquarters

New York City

Company size

Medium

Year founded

2014

Core product

Regtech

ComplyAdvantage offers AML screening and monitoring solutions.

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Suade

Suade

Headquarters

London

Company size

Small

Year founded

2014

Core product

Regtech

Suade aims to prevent the next financial crisis with the use of modern technology in regulatory compliance.

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AlgoDynamix

AlgoDynamix

Headquarters

London

Company size

2013

Year founded

Small

Core product

Regtech

AlgoDynamix leverages modern technology to improve existing prediction methodologies.

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Privitar

Privitar

Headquarters

London

Company size

Small

Year founded

2014

Core product

Data Security

Privitar offers privacy engineering technologies that help organizations manage data releases more effectively and identify sources of leaks.

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Financial Conduct Authority, a financial regulatory body in the UK, was the first organization to use the term RegTech. FCA defined it 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”. It is often the case the RegTech and FinTech are seen in the same light. Both are disruptive technologies aiming to facilitate business processes.

Banco Bilbao Vizcaya Argentaria, a multinational Spanish banking group recently hosted a RegTech innovation lab, where it emphasized the positive impact on the banking industry. BBVA has been a great advocate for RegTech companies. A quote from its paper makes it very clear what RegTech is really about – ” The term RegTech refers to a set of companies and solutions that marry innovative technology and regulation to address regulatory requirements across industries, including financial services. RegTech companies focus on the automation of manual processes and the links between steps in analytical/reporting processes, the improvement of data quality, the creation of a holistic view of data, the automated analysis of data with applications that are able to learn during the process, and the generation of meaningful reports that can be sent to regulators and used internally to improve key business decision making “.

What do RegTech companies do?

RegTechAmong many functions that a Regulatory Technology company can take, one of the most popular is anti-fraud and AML services. RegTech providers use big data and predictive algorithms to analyze customers’ transactions and assess the riskiness of each customer. This process is often costly and burdensome for banks and financial institutions to conduct on their own. RegTech companies have technology and experience to automate this process effectively and make sure that the client is complying with regulations. AML processes can include collecting data on customers to manage individual risk of each one or monitoring transactions to find anomalies and prevent money laundering.

Other popular service offered by the RegTech companies are collection of user data and storage of due diligence. With increasing KYC requirements, financial companies are required to collect more and more data on customers. This is especially difficult for online platforms, who do not have the luxury to meet with their clients face-to-face. In such cases establishing customer identity and collecting the data is very difficult. RegTech solutions have built tools that allow meeting KYC requirements with biometrics and other processes.

Another aspect of regulatory compliance that has come under scrutiny recently is the use of customer data. There are heavy repercussions for companies who fail to maintain user privacy and share customer data with third-party companies without customers’ consent. There are RegTech companies who specifically target these needs. These companies facilitate and manage the consent to use customer data.

Besides these, RegTech companies can take multiple functions, including facilitating reporting and communications with regulatory authorities, data processing and management, risk analysis, employee surveillance and so on. Automating reporting processes can increase efficiency and speed as well as keep the system more organized.

Advantages of RegTech

Speed is one of the most important advantages of RegTech services. These experienced companies with access to technological skills and resources can develop software that is much faster than employees processing data manually. Resources saved by the company because of higher speed can be spent more effectively on other tasks that require human involvement.

Adaptability is another great advantage of using a third party RegTech provider. Manualized processes are not only tedious and lengthy, but also require a lot of time to change. If a certain regulatory requirement changes and there is a need of response from the company, companies will find it necessary to change their internal processes. This will require re-training the employees that might be costly and ineffective. With RegTech companies these processes are automated, so adapting only requires making certain changes to a software or modifying an algorithm which is oftentimes much faster and easier to do. In addition, it is often the task of the provider to manage this changes and companies can simply give general directions and monitor the process from afar.

With automated services there is also greater transparency. All processes are recorded and monitored so that when there is a problem it is easier to identify the source of the problem and to fix it. With people this might be more difficult as during a critical issue many try to avoid responsibility. Online processes leave a trail that is easy to double-check and analyze.

How to choose a RegTech service provider?

Choosing a RegTech provider depends largely on the kind of service a company is seeking. Once the company has identified the specific services it needs to purchase there are several things to consider.

With RegTech companies it is often better to look for startups and newly built solutions. Even though some old and established companies often try to keep up with modern developments it is often the startups that have the most disruptive and cutting-edge technologies. Especially for a sector like RegTech, which is relatively new and requires modern approach. This naturally increases the risk of not getting the right services on the first try. But since, most technology based companies offer demo versions of their services, it is inexpensive to try out different solutions. So it would be more productive to try several new providers and find the right one than to look for new services in old partners.

It is also important to make sure that the solution is adaptable to changes. Nowadays, with the introduction of new technologies, regulations change quickly. This forces companies to adapt quickly and if RegTech solutions are rigid and can’t be changed easily they lose their appeal. So it is important to check how flexible the solution is. This can be double-checked with the provider as well.

Although RegTech companies provide solutions for many processes, these processes are already handled somehow within the companies. There are people who deal with regulatory issues, data collection and so on. Even though they might do this manually and less effectively they have experience in handling these issues. It is important to involve them when making decisions on which RegTech solution to implement. It would also be advisable to involve a wide group of employees from different departments as RegTech solutions often help with many issues other than regulatory compliance.

Why is RegTech important right now?

It is a great time to start thinking about implementing RegTech solutions and hiring third-party providers. Investments in the sector have reached record amount. In the last five years $5 billion has been invested in regulatory technology startups. More people are becoming interested in these services. Furthermore, new technologies have created regulatory gray areas and a risky environment for many companies to operate in. Mechanical processes can no longer keep up with the increasing requirements from regulatory authorities. Now is the best time to start thinking about how to increase efficacy in compliance and save resources on unnecessarily burdensome processes.

In conclusion, RegTech is a quickly growing sector that will likely be used by most major financial companies in the future. Digitization of many services is happening fast with disruptive technologies and online services becoming more and more popular. Finding a RegTech solution can make a big difference for companies when it comes to competitive advantages. Avoiding regulatory sanctions can often mean saving lots of funds and resources that can be used more productively. Implementing RegTech solutions increases company’s flexibility when it comes to changing regulatory environment and also takes out the human mistake risk factor from the process. It would be advisable for any company in need of such services to start looking for providers as soon as possible.