What is Regulatory Technology or Regtech?

The demand in terms of compliance is ever increasing within the financial services industry. As a classic example of efficient market dynamics, it means that a number of innovative Regulatory Technology (RegTech) startups, seized this opportunity and started to flourish to meet those demands. 

Put it simply, RegTech is just the combination of the words regulatory and technology. Quite similar to the way that FinTech, Finance and Technology, came about. It describes technology used to enhance regulatory process, but more broadly help with compliance in financial services. But what is RegTech? Is it the next big thing in FinTech? Or is it going to disappear as fast at it appeared?

The financial services industry is right now one of the most regulated industry in the world. Rightly so: it manages people’s money. People as in everybody from your mom to your local baker. From personal finance to the management of pensions, including good old business banking, its role is absolutely central to everybody’s lives.

Financial crisis backlash

Compliance and regulatory oversight have always been paramount in the financial services industry. However, the requirements have increased massively since the Great Financial Crisis of 2007/2008. It means that compliance services have transformed. They have gone through a major period of growth and investment.

There was a massive backlash against banks in the aftermath of the crisis as financial institutions seemed to be running out of control. There was compliance before, but not to the extent that banks have to deal with now. A huge number of new regulations and reporting requirements were introduced. And that is the case across almost all types of financial services. Nowhere to hide. It just became a huge burden in terms of costs and processes for banks, forced to hire hundreds of people as they were effectively unable to cope efficiently with this significant change.

Enter RegTech

RegTech companies are providing solutions in many areas: Regulatory Reporting, Risk Management, Identity Management & Control, Compliance, Transaction Monitoring, and many more.

It is the same idea as for broader Fintech: why not using technology to improve efficiency? Why not automate manual processes, and, more generally, find better ways to do things? For instance, using artificial intelligence to go through gigantic numbers of transactions to identify fraudulent ones. Or automating KYC (Know Your Customer) processes to facilitate the onboarding of new customers. There are plenty of potential use cases, mostly around automation.

The reason for that is simple: it is really good for repetitive manual processes. It is faster and more reliable than a human. And in the case of compliance, that is crucial. A lot of RegTech startups have either focused on tackling one of these use cases really well, or build a platform that allows them to solve for several of them.

So where do we go from here?

Firstly, we are unlikely to see less regulations for banks. Even though they have behaved better since the Great Financial Crisis, regulators are not going to be more lenient. Banks are arguing that they should get a bit more freedom but their role is still too central to the world’s economy. If anything, it shows even more nowadays as economics are flooded with government-backed loans.

Secondly, financial institutions that continue to rely on manual techniques and processes will likely fall behind. They will be unable to cope with the increase in compliance complexity and the costs associated with it. The winners will work with innovative RegTech startups to tackle these problems, relying on their expertise in deploying technology to deal with regulatory challenges. If it costs you less money to do something than the competition you have a competitive advantage. If it costs you more, you are falling behind.

Last but not least, neobanks and fintechs that are becoming sizable will have to face the same compliance burden. And the same regulatory scrutiny. RegTech is not going away!

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