“Regulation needs to catch up with innovation” – Henry Paulson, Banker,
74th Secretary of Treasury – US.
Traditionally, banks have relied on policy, procedure and people to comply with regulations, rather than on technology – most repeatable compliance processes are mostly handled manually.
It is a known fact that regulatory pressure on banks has been increasing since 2008. BCG reports that the number of regulations that a bank has to track on a daily basis has increased from approximately 60 in 2011 to a whopping
200 in 2015. Strategic response of banks has been to handle the increasing regulatory pressure via process and people, hiring more staff for compliance. At one point, Citibank was reported to have 30,000 employees working on regulatory compliance.
Despite this, European and North American Banks have collectively paid USD 321 billion in compliance fees in the period from 2008 to 2016. With increasing regulatory pressures, high costs of litigation and compliance fees, shrinking margins and shortage of compliance experts, banks are now looking at fine tuning this process in order to ensure compliance and avoid costly fees, as well as, keep running costs low.
Technology has played a secondary role in banks’ efforts to meet regulatory requirements in the past, playing second fiddle to process and people led compliance. In the recent past, the term Regtech was coined to denote companies that aim to enable institutions in moving away from manual compliance to compliance supported by technology. Technology is going to be increasingly important, and will perhaps look to augment human capabilities in the future.
Regtech – What’s New?
Institute of International Finance defines Regtech as “the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently”. Potential in this area is being widely recognized, with Regtech startups receiving a total funding of USD 2.99 billion between 2012 to 2016.
Regtechs differentiate themselves in several ways, most of them being technology based. Key ones being that they are:
The short term focus of Regtechs is to make repeatable processes automated via technology, while creating self-learning systems to handle more complex requirements in the longer term.
How can Regtechs Help Banks
Regtechs, bucketed under the overall Fintech umbrella, have the potential to be a bank’s best friend. Some of the areas where Regtechs can assist banks include
In addition to its usefulness to banks, regulators are also taking an active interest in this space. While private funding for Regtechs is concentrated in US and UK (US leads with 78%, UK coming in a far second with 9%), Regtechs are
receiving interest from regulators from other parts of the world as well. UK regulator FCA along with PRA have announced a fund to support adoption of new technologies for regulatory compliance or Regtechs. Singapore’s banking regulator MAS recently had a forum on Regtech as a part of its fintech program; and ASIC in Australia will feature Regtechs in its annual feature in April 2017. In India, a broader revolution is taking place, with e-KYC and
centralized KYC at the heart of it. The aim is to enable greater compliance with focus on being real time, analytics,
and AI driven rather than post facto and rule based.
Regtechs have only begun to scratch the surface of usage of technology for compliance. We anticipate that there will be an increasing push towards Regtech adoption driven by increasingly complex regulations. Regtechs can help banks move from manual process driven compliance towards automated intelligent technology led compliance, helping them cut costs associated with compliance and hence innovate in an agile manner.