For financial services organizations, compliance is becoming more complex and is a different challenge than it has been in the past. With the increasing regulatory pressures, coupled with the cost of compliance and staffing challenges, firms look to address regulatory technology, or RegTech, to address the new challenges that have come about with the rapidly changing compliance and regulatory landscape for financial services.
Faisal Husain,co-founder and CEO of Synechron
RegTech is currently one of the top trending buzzwords in financial services. Many regulation and compliance efforts are currently being managed by highly manual and error-prone systems and is ripe for change. RegTech is not only about tools to improve efficiency and effectiveness, but RegTech is more of an opportunity for organizations to be empowered to be in control of regulatory obligations and digital operations and manage requirements in a more holistic manner. By applying technological innovations to risk and regulatory obligations, firms are better positioned to tackle more high-value challenges because employees are not tasked with doing tedious manual regulatory activities.
The aftermath of the global financial crisis led to a lot of financial companies investing substantially in remediating existing regulatory issues, keeping up with new regulations and regulatory expectations and adding a substantial compliance headcount. Even though investments have increased greatly, businesses are still falling way short of regulatory expectations by maintaining highly manual regulatory and compliance processes, which lack meaningful data for transparency, and are very siloed in nature. Processes need to be digitized, automated and the game has to be upped in the business intelligence, artificial intelligence and predictive capabilities space.
What is RegTech?
RegTech takes the latest in greatest in technological innovations, such as data science techniques, artificial intelligence (AI) and automation, blockchain and more, to easily adapt to the regulatory requirements while being cost-effective and secure. These technology solutions will allow companies to automate processes like monitoring data and reporting to regulatory bodies. All the reporting can be done in real-time using data analytics. Especially given the number of headlines in the news about data breaches, hacks, and regulatory fines and violations, regulatory bodies are closely monitoring large financial organizations. This is especially the case for major financial organizations that deal with trading, payments and money transfers, which need to monitor all activities and report daily to the regulatory bodies. RegTech fills the current gap in the financial sector by ensuring compliance by automating these tedious and error-prone manual reporting processes by bringing technology, regulation, and financial services together.
Characteristics that define RegTech Solutions
Agility is one of RegTech’s main competitive factors. RegTech solutions aim to enhance speed, minimize risk and reduce the overall cost of regulatory compliance. Most RegTech solutions are cloud-based, which allows for data to be stored securely and managed remotely. That, in turn, reduces costs, produces quicker results, and affords organizations flexibility and reliability.
Why is RegTech Crucial?
Over the last decade, the financial services industry has seen a significant uptick in regulatory requirements, which is impacting businesses globally, and becomes very complex with the array of global and regional requirements that exist, and how large organizations with global clients need to juggle all of these. The key element across these regulations has been that financial institutions need to ensure that they are operating their business in a prudent and controlled manner. Furthermore, RegTech allows Financial Institutions to Take Control, Be in Control, and Demonstrate Control of regulation through better defined, documented and auditable digital operations. This will allow firms to break down regulatory siloes and manage requirements holistically.
Let’s look at a few aspects that RegTech can help financial institutions in:
Identity Management
RegTech technology can be used in Know Your Customer (KYC) processing. By combining AI, cloud storage and data analytics, data can be sourced from a number of verified sources. This reduces the operational cost, while at the same time helps in fraud detection and identifies any errors present in information. Strong identity authentication is required for organizations operating in the EU that deal with financial services, such as digital payments and remittance services. RegTech-powered identity management software will be able to identify the end-user, therefore, reducing the risk of ID fraud. RegTech brings digitalization to the KYC process, while also bringing cost- and time-reduction while verifying data and highlighting errors to reduce terrorist and money-launderer threats.
Fraud Prevention
RegTech allows organizations to scan and monitor multiple transactions and check the validity of such transactions. This whole process is carried out in real-time, therefore, all illicit and illegal transactions can be easily identified, and the right action can be taken immediately. RegTech provides benefits to all involved parties of a transaction. Organizations adopting RegTech solutions can adapt and reduce their operational costs, as well as reduce the risk of non-compliance fines and increase efficiency and speed, delivering a better customer experience.
Regulatory Reporting
With many organizations operating globally, companies have greater exposure to risk and need to verify who they are doing business with. RegTech provides transparency to all parties by providing verification about ownership and control. If there are any inconsistencies in the data, RegTech scans various datasets to find out the error-prone information and fill in the missing data.
Market Surveillance
RegTech allows firms to identify fraudulent or criminal activities by constantly monitoring money transfers, emails, trading data. The technology uses data analytics to identify certain patterns to find such nefarious behavior. The challenge is to reduce the number of false alarms and to report the correct information at the right time. The same technology can be used to assess the performance of the employees and various business units.
Fewer fines from regulatory bodies
Financial institutions need to adhere to the strict reporting of their activities. Heavy fines are imposed on financial institutions for not following the rules and regulations. Therefore, RegTech automates the compliance reporting procedure and safeguards the organization from cybersecurity breaches and inadequate financial reporting.
The RegTech Advantage
RegTech has many advantages for those updating their regulatory strategies and investing in the technologies, one of the more attractive features being the ability to deliver regulatory compliance in a shorter timeframe at a reduced cost. The very ability to take advantage of the plethora of data financial organizations generate for a variety of purposes, like identifying systems issues, fraud and abuse, and the requirement to implement security measures, can also help early adopters gain that crucial competitive advantage.
This will not just benefit businesses at large, but customer experience is enhanced with processes becoming more streamlined and quicker, such as with KYC requirements and reporting. Furthermore, organizations using the most up-to-date technology can offer advanced cyber risk protection, creating further competitive advantage.
A Huge Business Requirement in India
India is a land of opportunities. With investments and acquisitions rising by the day, regulatory technology needs to be implemented by businesses whether they are large or small in order to keep up. A number of businesses listed on various stock exchanges in the US have paid heavy fines for their Indian subsidiaries having compliance issues. Some of the penalties led to the companies’ stock prices falling drastically as well. Therefore, there is an urgency to implement RegTech, especially for Indian companies. There is a huge business requirement to achieve compliance, and only the largest established firms are paying attention to RegTech. The initial phase of accepting and implementing RegTech innovation, for businesses especially in India, needs to be completely focused on regulatory compliance and fraud prevention. With the development of key RegTech technologies like AI, data analytics and data visualization, expected products can be the ones which provide greater levels of analysis, not only of risk, but of performance, using existing information to extrapolate further into the future.
The Road Ahead
Some of the most complex RegTech solutions can be used for forecasting, scenario analysis, modelling and to complete required ‘stress tests’ that could further be developed to produce faster and more detailed results. Furthermore, data analytics would also be used in a predictive context for targeted risk analysis with respect to individuals and broadly for internal modelling to be used to develop strategy and report to regulators. Overall, the stage seems set for RegTech to be embraced by global financial institutions – the sooner, the better!
- Faisal Husain is co-founder and CEO of Synechron, a global consulting and technology organization providing innovative solutions to the financial services industry
