As fintech gains market share, automation helps meet demand
While presidents can change on one Election Day, the rule of law persists over time. How to apply and monitor these rules and regulations are being rapidly shaped by technology. When it comes to the financial industry, sound governance and regulations keep citizens safe while keeping our global economy thriving. Without these regulations, the economic infrastructure is akin to a house of cards. To keep the house intact, regulations need to consider the transformative nature of technology and the new nexus between data, automation, digital identity and regulation.
As it exists, the traditional, complex and costly compliance ecosystem is not sustainable for emerging fintech startups, as they do not have the resources or ability to survive and thrive. Blockchain. Virtual currency. Marketplace lending. Crowdfunding. Remittance – all fintechs moving money online will need to comply or risk million dollar fines or even face prosecution. Only fintechs that take compliance seriously will succeed in the end. Therefore, key questions to consider are:
How can governance throw down its rule of law without ringing the death knell for fintech? And, how can fintech meet its compliance regulations while continue being fast, innovative and agile – the key things that have made them successful in the first place?
The rise of RegTech
According to every doomsday advocate, ever - the end is near. In 2008, they were almost right; a global economic meltdown was only hours away before unprecedented intervention by the US Treasury. When the dust finally settled, policy makers knew they had to tighten the restrictions on financial institutions (FIs). Since then, new laws have been enacted, over $235 billion in fines levied, and rigorous compliance rules are increasing the breadth and depth of data reporting, aggregation, and analysis.
Emerging from the ashes of the 2008 Global Financial Crisis precipitated new regulatory technologies (RegTech) that helped to ease the burden of compliance and lower operational costs; technologies and regulations have fundamentally changed the nature of the financial industry. At the crux of these changes is the use of new technologies to regulate, monitor, report and comply without being stifled or needing to resort to a ‘nanny state’ system of governance that curtails innovation and economic progression.
Compliance is good business
Traditionally, big banks and FIs poured huge resources into meeting regulatory requirements, needing extensive staffing requirements and manual grind to go through mountains of paperwork and huge volumes of data for basic compliance. Instead of hiring 8,000 new compliance employees to manage the paperwork, forward-thinking FIs are taking advantage of automation and algorithms to process compliance information faster and more accurately.
The new sector of RegTech is growing - rapidly allowing lawmakers to enable new compliance requirements, while simultaneously easing the burden of fintech and financial institutions complying with tightening laws.
De-risking with the power of algorithms
Being compliant requires humans to learn and understand laws, regulations, rules and standards applicable in each market to ensure compliance do not fall through the cracks – risking fines in the millions and not to mention loss of reputation and credibility.
AML and KYC compliance is a bigger challenge for fintech and FIs that operate outside their home country – a common scenario given our digital economy today. It becomes more complex, as regulations often vary between different jurisdictions; compliance departments face a heavier workload and a steeper learning curve.
With RegTech, meeting Anti Money Laundering (AML) and Know Your Customer (KYC) obligations to prevent financial fraud from taking place is automated, powered by algorithms and data sets. Now, dynamic ongoing reporting is a possibility that no lawmaker could impose before due to high costs and complexities.
[tweet_box design="default" float="none" excerpt="Companies need to align their compliance requirements to a risk-based selection process — @StephenUfford @trulioo"]To effectively adhere to compliance requirements, companies need to first align their business and compliance requirements to a risk-based selection process.[/tweet_box]
From there, data sets need to be configured according to rule criteria, matching algorithms and more.
The key elements of RegTech - automation, speed, agility and data – have fundamentally transformed an industry weighed down by complex and shifting governance laws.
The battle of intelligence in the global fight against terrorism
Terrorism and homeland security is a key political agenda and there’s no denying that citizen safety is threatened by the movement of illicit funds for terrorism funding and arms proliferation through the dark web of the global financial system. The fight against terrorism will be, in part, the battle of intelligence behind the front lines and RegTech will play a key part in combatting financial fraud that threatens the safety of citizens.
Still, the problem is like trying to find a needle in a haystack. And there are a daunting number of haystacks. Algorithms and automation enables the possibility of identifying and verifying suspicious individuals trying to hide their identities to commit financial crimes online. RegTech is by no means the panacea for solving the global fight against terrorism, but the ability to accurately verify identities and restrict the flow of illicit funding is another tool for fighting the war of terror.
Politics and new policies shaping fintech startups
Fintech startups will come under increasing pressure to comply, or crumble. Traditional banks may feel that new fintechs are being given a free pass on many regulations, while fintechs feel hampered by onerous rules that aren’t applicable to their situation. Some fintechs and banks are collaborating, while other fintechs are going it alone, trying to bypass the status quo. The situation is political but, also, very practical; with the enormity of the technological possibilities, these regulatory determinations will have ramifications far into the future.
One thing is for certain, as compliance regulations progresses, fintech needs to adopt for themselves why they are selling – technology as a solution. By implementing RegTech, fintech will be that much more prepared and capable to deal with regulations and politics, no matter what happens.