The sector of financial technologies is evolving at an astonishing pace and its overwhelming growth of adoption turns the whole financial market upside down by digitalizing all components of traditional finance, including private and public sectors and regulatory bodies. In light of the above, a new term — “regtech” — emerged, standing for regulatory technology, or the management of regulatory processes in the financial sector with the help of technologies. Regtech easily found its place in the constantly progressing world, facilitating compliance with regulations and requirements for businesses in the financial sector.
Regtech has become popular due to strict limitations and regulatory uncertainty that were emerging in the financial sector and influenced the fintech industry and cryptocurrencies. It started to become more and more complicated for fintech companies to comply with current regulations and be on time as the rules of the game changed rapidly. It has been calculated that the employees of such companies spend up to 15% of their time at work on arranging compliance with regulations.
As per Deloitte’s relevant research, legal uncertainty and too strict limitations represent great problems to fintech companies as they constantly find themselves on the verge of violating this or that law. Apart from that, managing red tape is usually costly, reaching hundreds of millions of dollars in Australia as an example. In addition to that, noncompliance with ever-changing regulations or uncertain laws leads to big fines. As Boston Consulting Group states, the total amount of charged fines that global financial corporations have been fined with for regulatory inconsistency has summed up to $300 billion for the last 12 years.
What regtech is about
Regtech can be defined in two ways:
- Mechanisms and solutions based on information technology that facilitate the pursuant to the laws and regulations, reporting and risk management
- Enforcement and adjustment of existing business models
Simply put, regulatory technologies are a set of software-based solutions that enable companies operating in the financial sector, including banks, to fully comply with legislation in force and keep transparent records with less expenditure and risks. Regtech is a mechanism applicable to managing financial audit, monitoring legality, identifying and preventing potential risks, both in long- and short-term perspective. Using regtech can save a company good amounts of money by avoiding illegal operations and, thus, saving on potential fines. In total, regtech increases efficiency, enforces business operation and reduces operational costs.
Regulatory technology and anti-money laundering (AML) technologies combined
It’s impossible to evaluate the potential influence of regtech over the fintech and cryptocurrency industry without fully understanding the functions of both technologies:
- Automating the system of reporting and record keeping
- Automating the system of law enforcement control
- Automating KYC
- Executing control over financial transactions and detection of errors
- Risk identification and prevention
The stated above functions shape the essence of regulatory technologies as its main purpose is to facilitate law enforcement via controlling the fulfillment of norms and making this control automated.
The main barrier to a universal, globally accessible regtech system is the variety of laws and regulations that differ from state to state. Even though the basis for legislation is relatively the same, particular laws differ from one country to another, therefore, each country needs its own regtech. Nevertheless, a few attempts have been made to create a universal regtech technology that would be globally accessible. One example is the NEX Regulatory Reporting solution, which enables users to keep records and compose reports in full compliance with the legislature of European counties, USA, Australia, etc. Another successful attempt is Vizor, whose solution deals with reporting in the insurance industry. Other initiatives provide assistance with administration and audit.
KYC is a widely used AML instrument. It automates the registration of users, assists in detecting suspicious financial activity and risk management. Based on different algorithms, KYC platforms help companies keep a record of its active users, verify their identities by requiring passports or any other ID documents as well as residential addresses to check user identity and criminal records.
No matter how much decentralization promotes the principle of absence of regulatory authority, executing control in the financial sector is very important. In some countries, fintech companies are obliged to have KYC procedures to identify users with documentary proofs of their identities and other personal information. Apart from that, AML instruments tailored to execute control over financial transactions can provide data for statistics and business development.
Analyzing statistical data, identifying and preventing risks, creating technologies — all these things add to a company’s reliability, good reputation and prospects of business development. There are software solutions that help in assessing fintech companies by the factors stated above. Among them are ComplyAdvantage (deals with enterprise valuation), Kyckr Ireland (market research company), and Convercent (a venture following changes in legislature).
AML instruments and regtech realization
Implementing AML instruments is quite expensive, in regard to which companies tend to require a compliance job to be done with the utmost efficiency to provide as much benefits to the company as possible.
Some businesses focus on the use of regtech and AML instruments so much that they spend lots of funds on traditional AML and regtech solutions, instead of making investments and diversifying income sources.
AML and regtech usage
- Facilitated audit and reporting for data to be better used for regulatory compliance. It is aimed at reducing user error.
- Getting the most out of possessed data, including using it in decision-making processes. It enhances the company’s positioning and value.
- An advanced approach to implementing changes and innovative solutions. This is of the highest importance as state legislature and business directions are changing all the time.
In this regard, newly emerging technological solutions like artificial intelligence, NLP approaches and smart contracts enrich anti-money laundering techniques and regulatory technology with greater opportunities, putting them on top of must-haves in the financial world. The innovations and fast-pacing developments that characterize the modern economy make it completely impossible to stay up on the financial market without using these solutions, which is also applicable to fintech businesses.
With each passing day, the issue of legal compliance becomes more and more topical, and compliance costs are believed to be increasing in the coming years. The industry is becoming more complex and sophisticated, and soon it will be too complicated to enter and exist there without regulatory guidance. Regtech is expected to become a competitive advantage in the future, giving great benefits to companies using it and facilitating their red tape and operational routine and automatically updating highly-important information viable to a company’s existence. After all, technology always does things much faster than people.
Regtech and AML — too much or the future of finance?
Regtech uses all types of advanced technological solutions such as artificial intelligence and robotics to automate and digitalize legal compliance, which contributes to the emergence of novel top-quality business models.
Regtech and AML are saviors in the adjustment of a company to ever-changing circumstances and legal grounds. These technologies guarantee top-notch performance and reducing human participation in the process of regulatory compliance.
Regtech and AML are going to do the toughest part of the job and represent a new level of technological evolution and business automation. Less time and funds will be spent on red tape procedures, enabling company executives to devote these resources to business development.
Fintech companies can increase their value and enhance creditability by using regtech and AML and taking the most out of the benefits that these tools provide.
The regulations that are getting more and more stringent can be dealt with by regtech and AML much more efficiently and much less expensively than if managed by human resources. Fintech companies are following enterprises from the traditional financial sector in adopting regtech and AML simply because regulations become too complicated to deal with.
The adoption of regtech and AML makes finance much more transparent and automated and serves as a bridge between traditional finance and a revolutionarily changing world.
Thus, regtech is what financial markets need at the moment. It will help manage risks, arrange analytics, reduce costs and enhance efficiency to the levels required to be a worthy competitor to all market players.