Regulatory technology (RegTech) is the application of emerging technologies that help companies in the banking and financial services sector to improve the efficiency of regulatory reporting and compliance, at lower costs. RegTech also helps regulatory bodies to monitor financial services companies better to prevent frauds and criminal activities and ensure financial safety of consumers.
RegTech is the management of regulatory processes in the banking and financial services sector using emerging technologies such as machine learning and AI, cloud computing, big data analytics and blockchains. These technologies help companies manage their regulatory reporting and compliance processes efficiently and reduce the overall compliance costs. RegTech is also used by regulatory agencies to manage processes such as real-time monitoring of financial services companies and making sense of a huge amount of reporting data to identify frauds, criminal activities and privacy violations. The technology solutions employed by regulatory agencies to supervise companies is also referred to as SupTech.
The growing need for RegTech
The 2008 financial crisis resulted in two seemingly opposite initiatives. First, central banks and governments world over created new regulations aimed at stricter controls on how the banking and financial services industry operated thereby increasing the number and frequency of reports and effectively escalating the cost of compliance for the industry. Second, frustrated with the failure of the existing global system controlled by central authorities, Satoshi Nakamoto whose identity is still a mystery, created a digital currency which would operate without the regulatory shackles and without a central point of failure, using a revolutionary technology called blockchain.
The advent of steep fines for regulatory violations, a barrage of new regulatory provisions as well as the increasing number of financial frauds and criminal activities created the ideal conditions for the emergence of technology solutions that could reduce the regulatory risks for financial firms as well as control the rising compliance costs while keeping the consumers protected, paved the way for the emergence of RegTech companies.
Types of RegTech solutions
The following are the different types of RegTech solutions that have emerged in the last decade.
- Anti-money laundering (AML) & fraud management
- Regulatory Intelligence
- Risk and compliance management
- Regulatory reporting
- Identity management
Growing market for RegTech
Increasing complexity and the sheer volume of transactions and the increasing number of frauds, privacy violations and other financial crimes along with technology innovations have resulted in a huge market for RegTech. The global market for RegTech is estimated to be around US$ 5 billion and expected to grow rapidly. Venture capital investors have poured in a huge amount of funds in RegTech startups. Some of the major global RegTech players include Chainalysis, ComplyAdvantage, Ascent Regtech, Forter. And Hummingbird. Top Indian RegTech companies are CrediWatch, Simility, Fintellix, and Digio among others.
What is the future of RegTech?
FinTech maximalists believe in the utopia of the freedom of the markets without any central authority or regulation. The emerging DeFi (decentralized finance) protocols aim to do just that. However, just like how self-driving cars, though fully automated, still need to follow traffic rules to ensure passenger safety, DeFi protocols that are ‘self-driving banks’, will require regulation to keep criminals at bay and ensure the financial safety of consumers. While the emerging FinTech companies are bringing hitherto-ignored unbanked millions into the banking and financial services system, the risks of privacy thefts, frauds and criminal activities are also increasing tremendously. Most would agree that we need regulation but the contentious point is how much regulation is optimal?
Regulatory authorities have the unenviable job of ensuring that the regulations are strict enough to prevent frauds, criminal activities and privacy violations but lenient enough to encourage innovation and growth in the banking and financial services sector. RegTech helps solve this dichotomy. It makes it easier for financial services companies to comply without hindering innovation and growth of the industry while simultaneously ensuring consumer protection.