Regtech: Definition, Key Characteristics and Practical Applications

Regtech: Definition, Key Characteristics and Practical Applications

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Regtech a blend word for regulatory technology is a new fintech area emerged to enhance the regulatory and compliance processes for the financial services industry with the use of innovative technology. This blog post will provide an overview of this sector by looking at its main characteristics and analyzing few case studies when regtech was applied or may be useful for financial companies.

One billion dollars per year is the amount that according to the Institute of International Finance (IIF), can cost compliance to a financial institution. Nowadays the situation with data protection and management has become highly complicated as institutions are producing growing amount of data and regulators are constantly requesting the access to this information to control system risk better and enhance the compliance burden on financial institutions. This is where regtech comes to help. By simplifying and streamlining tangled compliance processes, with the use of APIs and more in general with technology, to mitigate risks and lower the number of resources needed to deal with it. Emerging innovations like blockchain and the distributed ledger (DLT), as well as AI, machine learning, cloud computing and biometrics, are already helping with this and will have an even bigger impact in the future, to make the whole compliance process much swifter and smoother. Just consider, as a simple example, that with the use of regulation technology is possible to onboard approximately 95% of customers in an automated way, leaving the limited human resources to better use, for the onboarding of the 5% customers that require human judgment.

“Like fintech, paytech, and many other combinations of x-tech, regtech is another example of an industry that is being changed rapidly by software. There has been the technology used at various levels in the regulatory space for over 20 years. However, what the new regtech label recognises is that the gap between software and non-software enabled services has widened significantly,” explains Alan Meaney, CEO of FundRecs, a reconciliation software for the fund’s industry, in a report Regtech is the new Fintech by Deloitte. They did a great job to identify the defining aspects of this new development trend. The key characteristics indicated for regtech are the following:

  1. agility – get more efficient access to cluttered data sets, that can be easily reorganized through ETL (Extract, Transfer Load) technologies,
  2. speed – every kind of reports can be built and generated in a very short time,
  3. integration – with complex regulation translated into API code, it takes less time to get new solutions implemented,
  4. analytics – analytics tools are used to mine existing data sets of big data unlocking their true potential by using, for example, the same pieces of data for multiple purposes.

All these characteristics make crystal clear that reducing compliance costs and building scalable solutions with higher risk control through advanced analytics, are goals that will not take a long time to be achieved with the help of regtech. With all this in mind, what are some practical applications of the regtech solutions? Here some examples:

  • identity verification – automated identification solutions, like blockchain identity or iris and fingerprint scanning, to comply with know your customer (KYC) regulations and streamline onboarding,
  • fraud prevention – fraud detection and real-time transaction monitoring to address also counter terrorist financing (CTF) and anti-money laundering (AML) regulations,
  • reports generation – automatically configure and deliver reports to key constituents,
  • predictive analytics – forecast firm-specific risks associated with regulations by analyzing, with the use of technology, the causes on the basis of previous regulatory breaches.

These are just a few of potential regtech use cases with much more to come with the quick progresses that we see for the technologies used for these applications. The main challenge now seems the communication among the various actors of the financial industry, represented by fintech and regtech companies, financial incumbents and market regulators, that will have to talk to each other and cooperate for the development of this new area, for the benefit of the whole financial ecosystem.

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