The latest digital technologies are seeping into the financial sector with immense benefits. However, their advent has also raised the possibilities of cyber security threats, data breaches, and numerous forms of fraud. To mitigate these threats, the banks, financial institutions, and insurance (BFSI) sector face pressure from regulators on compliance and governance. This is where RegTech comes into the picture.

Fintech and RegTech: Similar concepts or distinct terms?

Fintech is dedicated to solving problems within the financial sector through cloud-based solutions, and a myriad of other technologies. On the other hand, RegTech, or regulatory technology, helps BFSIs stay updated with regulatory changes and adhere to legal requirements to prevent financial crimes.

The financial crisis of 2008 exposed significant weaknesses in the global financial system, which led to a surge in regulatory requirements. This created a complex and ever-changing regulatory landscape, particularly in the financial sector. The increasing complexity and volume of regulations raised the cost and effort required for businesses to stay compliant. 

Traditional methods of compliance management became inadequate and inefficient, especially with the rise of technological advancements like artificial intelligence (AI) and big data analytics. Moreover, there was a growing demand for enhanced transparency, which eventually led to the rise of regulatory technology (RegTech).

What are the major technologies supporting RegTech solutions?

  • Big data
  • Application Programming Interface (API)
  • Machine learning
  • Data mining and analytics
  • Cloud computing
  • Artificial intelligence (AI)

What challenges does RegTech address, and what benefits does it offer?

BFSIs relying on traditional, or ‘legacy’, compliance solutions face significant challenges in the rapidly changing regulatory landscape. These legacy systems are often inflexible, not easily scalable, and cannot efficiently process the vast amounts of data required for modern compliance. 

This rigidity of legacy systems renders them inadequate in adapting to new regulations. Hence, increasing the risk of regulatory breaches. Furthermore, these outdated systems often require manual intervention, which makes the compliance process more time-consuming and prone to human error. In this context, RegTech emerges as a crucial tool. By leveraging advanced technologies like AI and machine learning in finance, RegTech automates and streamlines compliance processes, therefore reducing the risk of regulatory issues by a significant margin.

The benefits of RegTech can extend to the following areas: 

Real-time reporting

With advanced data analytics, BFSIs can perform analysis in various ways, such as: 

  • Real-time user engagement 
  • Regulatory ecosystem analysis 
  • Scenario analysis on a global scale 

As a result, firms can identify risks, issues, and opportunities proactively.

Simplified data management

The surge in digital transformation over the past decade has led to vast amounts of structured and unstructured data. FIs utilize this data for extracting actionable insights. However, storing and analyzing such data requires high levels of computing power and compliance with regulations from governing bodies.

To add on that, the regulations keep evolving, thus pushing BFSIs to adopt a more dynamic and strategic approach toward data handling. In this lieu, RegTech solutions play a pivotal role by enhancing the transparency and efficiency of regulatory filings for all firms.

Risk and fraud management

Risk management solutions facilitate automated credit assessments to determine the ideal level of exposure and limits. Ultimately, BFSIs are widely adopting RegTech solutions in key areas like: 

  • Know Your Customer (KYC) 
  • Real-time Anti-Money Laundering (AML) screening 
  • AI and ML-based fraud prevention 
  • Real-time compliance monitoring. 

There is also a growing interest in utilizing cloud computing for data standardization, cleansing, and provenance audits.

Reframing regulations and implementation of new governance frameworks

Often referred to as compliance intelligence, RegTech systems oversee the present compliance status against impending regulations and real-time compliance. This capability enables companies to adapt their processes to anticipate future regulatory changes.

Predictive analytics

Predictive analytics examines the root cause of a regulatory breach. It uses such information to predict gray areas and compliance issues, making it useful for risk modeling.

RegTech: Leading the way for a transparent future

RegTech indeed boasts a bright future, especially as the world moves towards an enhanced level of transparency in financial services, transactions, and data governance. Organizations must revisit their existing regulatory technologies and develop proactive RegTech strategies. This will not only enable them to keep pace with the evolving regulations but maintain a competitive advantage in the market as well.