Regtech involves the application of technology to make regulatory compliance easier and more effective. It is predicted that the global demand for regulatory, governance and compliance software will hit $118.7 Billion by 2020. This points to the almost certain expansion in the application of Regtech. This article discusses some of the things that make Regtech a significant technology in the financial services industry.
- No Competition with Financial Institutions
Unlike fintech which disrupts the financial services industry, Regtech does not compete with the existing players. In fact, it helps them to operate more easily and efficiently. Consequently, the legacy institutions are more open to partnership with Regtech startups.
- Regtech is Considered Broader than Fintech
While Regtech is considered a sub-segment of fintech, it is actually broader than fintech. There is non-fintech regtech which includes solutions for other industries. Regtech firms such as Bigcontrols and KoreConx help companies in other industries in incentive management, document automation and information storage.
- Market Surveillance
All participants in the global capital markets are looking for some advantages. However, some advantages such as insider trading and spoofing are outlawed in almost every jurisdiction. Regtech startups are providing useful tools for market surveillance to root out these practices. It is now possible to monitor market participants using newsfeeds, chats and emails. Companies such as sybenetix combine advanced data analytics with behavioural science to manage employee conduct more effectively. Further, the application of machine learning technology makes it possible to aggregate voice and chat communication among traders over multiple channels converting the same into usable data.
- Regulatory Reporting
The need for regulatory reporting has increased tremendously over the years since the 2008 financial crisis. Extracting data that is critical for financial reporting has traditionally been a difficult process characterized by errors. This is where regtech comes in handy by developing data aggregation tools that combine data from multiple sources to come up with a single dataset. Any inconsistencies in the source databases is quickly notified by the software. Additionally, regtech firms such as fintellix specialize in regulatory monitoring providing up to date reporting format. This saves time and labour as employees do not have to monitor the ever changing reporting requirements manually.
- Stress Testing
For financial services companies, stress testing of their balance sheets is becoming an important regulatory and risk management tool. Most banks have challenges in delivering accurate and timely data, chiefly because such data is contained in different databases often in outdated systems with incomplete information. Regtech firms are coming up with platforms for risk management, stress testing and the calculation of capital requirements.
- Fraud Detection
Regtech solutions offer more reliable protection against internal and external fraud. These include identity verification and alerts on suspicious activities. While this extends beyond the financial services sector, firms such as Netguardians and Risk Idents provide these services to firms in the financial services industry by monitoring transactions to detect fraud.
- Automation of Controls
Regtech makes it possible to automate interpretation as well as application of regulatory rules to deal with potential issues. Unfortunately, many traditional financial institutions have their control functions relying on outdated manual systems that hardly cope with the complexity of the finance industry. Setting more controls, hiring more staff to manage them and sometimes pushing controls towards the front office is not a solution as it distracts sales people from what they are actually hired to do. Thanks to regtech, it is possible to automate these controls as currently, firms such as Capnovum and Continuity are working on smart solutions for the financial services industry.
- Monitoring of communication
Modern technology characterized by multichannel communication such as whatsapp and facebook messenger presents a challenge to compliance officers in tracking communication. Some regulations require companies to store client communication. This makes regtech a useful compliance tool.
- Know your customer (KYC)
Linking clients to bad press is quite a challenge especially for small companies due to varying spelling of names. Consequently, onboarding and monitoring process is rather slow. Regtech firms such as ComplyAdvantage provide strong analytics tools that are effective and do not need much human involvement.
- Data Security
Certain regulations oblige financial institutions to meet particular data security standards specific to the financial services industry. Fortunately, companies like Alyne operate in this space.