Over the past few years, financial institutions (FIs) have been aligned with fintech on various facets of the business. While the primary focus was on customer-facing areas, companies have now started dedicating attention to back-end aspects also. With added pressure from regulators on overall data compliance and governance, RegTech within the fintech ecosystem has gained significance, and with digitisation and automation of various compliance obligations, RegTech is helping improve effectiveness, reporting accuracy, and transparency in the financial sector.

What is RegTech?

RegTech is also popularly known as regulatory technology. The term RegTech was first presented by the UK’s Financial Conduct Authority (FCA), which described it as ‘A subset of fintech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities’.

In easier terms, it refers to any technology that helps companies in meeting their regulatory obligations. RegTech is the management of regulatory processes within the financial industry using technology. The main functions of RegTech include monitoring regulations, reporting, and regulatory compliance. RegTech or regulatory technology uses the power of Big Data, Artificial Intelligence and Blockchain to reduce financial risk, increase regulatory compliance and help monitor money laundering and fraud.

History of RegTech

After the 2008 financial crisis, the financial sector regulation increased manifolds. Post-crisis fines collected from banks in the United States alone exceeded $200 billion. In addition to this, the annual spending by these financial institutions on compliance itself was estimated to be more than $70 billion every year1. As a result, the cost of regulation and compliance has become a prime concern for the banking industry. There was also a rise in the augmented use of technology within the financial sector. Technology advances and innovations led to an increase in the number of fintech companies that created technology-driven products to enhance the customer experience.

The pure dependence on customer data to produce digital products has led to concerns among regulatory bodies calling for more stringent laws on data privacy usage and dissemination. The combination of more regulatory measures and laws with a sector more reliant on technology brought about the need for regulatory technology. Figure 1 shows a diverse spread of regulatory measures that affect different business settings.

Through the digitisation and automation of processes, RegTech provides a cost-effective solution to meet these regulatory obligations. Technology-based systems can help financial institutions collect data and produce reports following the format and schedule required by various regulatory bodies. For regulators, it strengthens their regulatory and supervisory capacity by effectively using the data they receive to monitor the rapid developments happening in the sector.

Understanding the worth of RegTech

A rise in the usage of digital products has given space for the growth of data breaches, cyber hacks, money laundering, and other fraudulent activities. RegTech solutions use the power of big data and machine-learning technology to reduce cyber and money-related fraud risk by offering data on money laundering activities that a traditional compliance team may not be able to give due to the overload of work or oversight.

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