If you’ve ever sat down and dug into the various regulations your company must remain compliant with, from the GDPR to the Payment Services Directive to the Dodd-Frank Act and beyond, you will no doubt have realized:
Financial regulation is complex.
It's also constantly changing, with some sources stating that a new regulatory change comes into effect every 7 minutes.
Not only that, but fines for non-compliance are on the rise. And as work increasingly moves into online spaces, where data is vulnerable to malicious attacks, it's no wonder that business leaders are becoming increasingly concerned with regulatory compliance.
So much so that a new software category has emerged to solve that need: RegTech.
Shorthand for regulatory technology, RegTech is an emerging set of technologies aimed at helping businesses manage regulatory processes in the financial industry.
In this article, we’ll shine a light on this new set of tools, explaining what RegTech is, where it comes from, its primary benefits, and key subcategories you’ll find amongst solutions today.
What is RegTech?
RegTech (regulatory technology) is a software category that serves the financial industry, helping companies maintain compliance with ever-changing regulations, solve problems related to a technology-driven economy, and protect themselves against online threats like data breaches.
It combines data analytics, artificial intelligence, and automation to streamline compliance, helping business leaders identify threats and potential areas of non-compliance, as well as aiding them in adapting to regulatory changes.
Where RegTech comes from
To understand why and how RegTech has emerged, let's take a few steps back in time.
The RegTech story starts back in 2008 when the banking system collapsed, a global financial crisis ensued, and governments around the world, particularly in the United States, introduced stringent new financial regulations.
Of particular importance was the Dodd-Frank Financial Reform Act, signed into law in 2010 by the Obama administration, which sought to better regulate financial institutions to protect the consumer.
It was met with mixed reactions, but here’s not the place to get into that.
The idea is that from that point in time onwards, the financial sector has increasingly become the subject of a number of important regulations. As a financial organization, it's your responsibility to stay current and compliant with these rules, many of which relate to customer data management.
This is a tricky task since the rules often change (reflecting a changing environment), and many businesses are increasingly adopting online software technology (increasing risk).
In the mid-2010s, a need had already emerged, and while RegTech companies had already begun to receive funding, adoption was not widespread.
Understandably, there would-be customers were skeptical of RegTech’s ability to solve the problem, where, in most scenarios, the margin for error is zero.
The huge growth in AI capabilities over the last few years has been a huge game-changer for RegTech companies, allowing their tools to process immense data sets and make accurate inferences in seconds.
In short, the underlying tech now has the ability to meet the original and still-growing need, meaning RegTech is likely to be increasingly funded and adopted over the coming years.
Difference between RegTech vs FinTech
Since RegTech and finance are so intimately connected, it's not uncommon for the question to arise:
What’s the difference between RegTech and FinTech (financial technology)?
Here are the main ways in which they differ:
- Purpose and focus. FinTech is focused on improving and automating financial services, such as lending, investing, and payments. RegTech specializes in technology that helps businesses manage regulatory compliance.
- Target audience. FinTech targets end-users, including both consumers and businesses. RegTech targets financial institutions, which may include FinTech companies.
- Technology application. Both categories utilize technologies like automation, AI, machine learning, and blockchain. FinTech applies these technologies to create innovative financial products and services. RegTech uses them to monitor, analyze, and report on data related to regulatory compliance.
- Regulatory involvement. FinTech companies must comply with financial regulations as part of offering financial services, but this is not their primary business concern. For RegTech companies, regulatory compliance is the focus; it's what they help their customers with.
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Some examples of FinTech companies include digital payment platforms like Square and Payment or spend management tools like BILL Spend & Expense.
RegTech, on the other hand, is made up of compliance monitoring companies such as ComplyAdvance and Know Your Customer solutions like Trulioo.
Four benefits of RegTech
RegTech offers finance businesses a number of benefits, many of which can be grouped under the following four categories.
1. Improved efficiency
As regulations continue to be added or amended, it's becoming nearly impossible for even an in-house team to stay consistently and constantly on top of the current rules.
Technology capable of pricing high volumes of data at speeds much faster than humans through the use of AI and machine learning is the only way for teams to stay on par with current regulations.
2. Reduced compliance costs
Keeping up-to-date with changing regulations is a costly exercise.
If you manage it manually, you’ll require a team of legal and technological experts, which will become a significant cost center, to see the least.
3. Enhanced reporting accuracy
Many RegTech tools have a strong focus on reporting abilities, allowing compliance leaders to dive into real-time dashboards and instantly pull out reports to send up the chain.
They not only make complaint reporting easier but also enable more accurate reports to be produced faster.
4. Better risk management
Managing compliance risk is a huge focus point for RegTech.
These powerful tools help you protect yourself against fraud, cyber attacks, data leaks, market abuse, and other forms of online threats.
Seven common RegTech categories
As the RegTech sector develops and expands, we are seeing tools specialize and develop more targeted abilities.
The following are seven of the most common categories that today’s RegTech software platforms fall into:
- Regulatory reporting. These software tools automate the process of collecting and analyzing data to help ensure compliance with reporting requirements. Examples include Workive and AxiomSL.
- Risk management. This category of tools helps organizations identify, assess, and manage various kinds of risks, such as compliance, financial, and data risks. Examples include SAS Risk Management and MetricStream.
- Compliance management. These tools help companies adhere to laws, regulations, and internal policies as and when they change. Examples include ComplyAdvantage and Thomson Reuters Compliance Learning.
- Identity management and KYC (Know Your Customer). RegTech tools in this category help you comply with KYC and AML (Anti-Money Laundering) regulations. Examples include Trulioo and Jumio.
- Transaction monitoring. These software tools monitor a company’s financial transactions in real time to detect and report on suspicious activities. Examples include Fenergo and Actimize.
- Regulatory intelligence. This category of tools provides insights and updates on regulatory changes and trends. Examples include CUBE and IBM OpenPages.
- Data management. These tools help organizations manage data quality and governance to improve reporting accuracy and maintain compliance. Examples include Collibra and Informatica.
Examples of RegTech use cases
So, what does the use of RegTech look like in real life?
Let’s explore a few different applications and use cases.
Banking and financial services
Financial institutions are required to monitor all transactions to detect and then report any suspicious activities that could be related to money laundering.
HSBC, for instance, uses Actimize for AML compliance. The platform analyzes HSBC’s transaction data in real-time to spot patterns and anomalies that might indicate the presence of money laundering.
Insurance
Insurers are always concerned with the identification and prevention of fraudulent claims, not only to comply with regulations but also to reduce loss.
Zurich Insurance, for instance, uses a RegTech platform called Shift Technology to help with fraud detection. The tool uses a combination of AI and ML to analyze claims data and detect any patterns that might indicate that a claim is false or fraudulent.
Healthcare
Healthcare organizations must submit reports to regulatory bodies, such as the Centers for Medicare & Medicaid Services (CMS), to comply with healthcare regulations.
Kaiser Permanente, for example, uses Workiva to automate the preparation and submission of such reports.
Challenges and considerations when implementing RegTech
Like many of today’s business leaders, you’re probably considering implementing regulatory technology in your organization.
So, what kind of considerations should you bear in mind beforehand?
Here are a few of the most common challenges you might come up against:
- Integration with existing systems. Many organizations, particularly long-standing ones in the financial sector, are operating on legacy systems that might not easily connect with modern RegTech solutions.
- Investment and ROI. Implementing Regtech can be expensive. Smaller organizations may struggle to see or even measure the ROI, especially since a major impact is risk reduction, something that is difficult to measure in and of itself.
- Customization and flexibility. While many RegTech solutions are designed to be flexible and serve the unique needs of enterprise businesses, some companies may note that specific tools are not a perfect fit for their regulatory requirements. Finding the right solution may take some trial and error or lengthy trial processes.
- User adoption and training. A lack of proper training or resistance to change can impede your ability to effectively implement and integrate RegTech.
- Vendor risk management. Investing in a RegTech solution means relying on third-party vendors, which introduces data risks as well as the risk of vendor failure, leading to extended service interruptions.
Connecting FinTech and RegTech
For businesses that are concerned with regulatory compliance and looking to implement modern RegTech solutions, a key priority will be creating an integrated software infrastructure.
You’ll need to choose RegTech solutions that play nicely with your finance tools, and vice versa
BILL, our financial operations platform, integrates with dozens of popular platforms. We also take our own data security seriously, helping you prevent financial fraud at the source.
