regtech providers

Regulation technology, or RegTech, is an area that is growing rapidly. The Institute of International Finance (IIF) defines RegTech as the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently. It’s no wonder that RegTech is taking the financial services industry by storm.

In our previous blog post about RegTech, we discussed the need for RegTech as well as how it will shape the future of financial regulation. Now let’s look at some of the key areas that are driving demand.

RegTech Growth and Innovation

As it becomes more feasible to use RegTech solutions to automate the compliance process, many gains can be expected. Some of these gains include better customer experience, greater financial inclusion, improved Know Your Customer (KYC) compliance, increased profitability, and lower operating costs.

Improved customer experience using online verification
Consumers increasingly expect more real-time digital services to meet the needs of today’s on-demand world. This is especially true when it comes to verifying identities. Requiring hard copies of identity documents to be mailed or presented at physical locations before opening an account online slows down the onboarding process and increases customer friction. With the prevalence of instant online identity verification, this degree of customer inconvenience is fast becoming obsolete.

Increased financial inclusion
The current financial system favors those who can readily produce government-issued proofs of identity and those that have deep traditional data footprints. For those individuals lacking both, access to even the most basic financial services like a savings account becomes increasingly difficult. Augmenting a digital identity, such as an individual’s online profile that leverages non-traditional data sources like social media networks, will create greater levels of financial inclusion. In addition, this cyber ID is an alterative data source that can also be utilized to increase confidence for online ID checks.

Greater customer due diligence
KYC regulations continue to change and become increasingly strict. Financial institutions are expected by regulators to collect and retain large amounts of information about their clients. In many cases, more than 300 data attributes must be tracked, which makes providing ongoing reports to regulators a daunting task. RegTech can automate the process, thus reducing the workload burden for compliance teams.

Increased profitability
With technologies such as application programming interfaces (APIs) that facilitate frictionless cross-border transactions, financial services providers can drive customer acquisition rates, increasing profitability. APIs enable access to global data sources for cross-border compliance seamlessly into existing platforms.

Cost savings through automation
A very appealing reason for financial institutions to adopt RegTech solutions sooner than later is cost savings. By reducing both the amount of time and the number of staff needed to meet regulatory requirements, banks and other similarly regulated businesses can save on their compliance costs while faster, more reliable reports.

Challenges Preventing Adoption

Although there are many good reasons for RegTech adoption, there are still many obstacles that need to be overcome. An article by JWG Group highlighted what it sees as the main challenges: motive, mandate, complexity, and timing.

There is currently a lack of clear motivation from financial institutions and solutions providers to create common solutions that would benefit all regulated companies. Most financial institutions tend to address new regulations seeking out the most cost-effective way to comply with each individual regulation, rather than taking a more holistic approach. Vendors that develop RegTech products frequently face a slow and convoluted authorization process or are unable to compete with the strong pre-existing business relationships that financial institutions have with other solutions providers.

No clear mandate
Without collaboration between solutions providers, financial institutions, and regulators, there is no clear
mandate to have discussions to find common solutions. A neutral third party may be needed to drive the RegTech agenda forward so that all parties will continue the dialogue. Since RegTech as a sector is still quite new, there has yet to be a mutually agreed set of standards for developers to follow to reduce costs and risk. Having such standards in place will make RegTech solutions more attractive to potential users.

Regulatory complexity
In more recent years, regulations have become considerably more complicated. Regulators published 500 percent more documents between 2009 and 2014 than they did during the previous five-year period. It is now more difficult than ever before to keep up with the constant changes in regulations, especially for companies operating in multiple jurisdictions. Through greater collaboration among all stakeholders, RegTech providers can more easily identify opportunities for developing solutions that will meet the needs of financial institutions.

With such a vast number of regulators updating their regimes throughout the world at any given moment, it is inevitable that some new regulations for different jurisdictions will have similar deadlines. This can cause havoc for financial institutions that have to deal with conflicting timelines from different regulators.

Collaboration Fuels Innovation

While the benefits of RegTech for financial institutions are immediately clear, what may not be as apparent is that regulators also stand to gain. New regulations require banks to collect increasingly larger amounts of data that can be useful to regulators. In order to make the best use of this data, APIs created by RegTech companies can bridge the gap and ensure that regulators receive the data in a consistent format that provides an overall view of the market.

“RegTech brings together unlikely partners – banks, regulators, and technology firms – to create solutions that will benefit the financial services industry as a whole,” said Jon Jones, President at Trulioo. “It’s only through collaboration that financial institutions can achieve reliable, cost-effective compliance while regulators can ensure that regulatory control is being managed effectively.”

Where do you see the greatest growth potential for RegTech providers?