The Rise of Regtech: How Software Can Help Cut Regulatory Risks

The Rise of Regtech

The volume of data produced by the financial industry today is massive. Leveraging this data to extract customer insights and prevent fraud requires analysis beyond the ability of any single team. Regulatory technology – or Regtech – is the branch of emerging technology rising to meet the challenge.

Today’s infographic from Raconteur offers a glimpse into the world of regtech, and how it can help financial services firms in finding efficient, cost-effective methods to comply with regulatory standards.

What is Regtech?

Following the financial crisis of 2008, the finance industry was hit with a number of new regulations designed to reduce risk and prevent fraud. Finance companies who fail to comply with these stringent regulations can face steep fines, but failing to find efficient ways to stay compliant can also impact the bottom line.

Regtech fills this gap with tech-driven solutions for financial companies to cut costs and streamline processes, while guarding against fraud and cybersecurity risks. They can remain compliant without sacrificing customer engagement, allowing them to continue to grow their businesses.

How does Regtech work?

Regtech solutions usually operate as cloud computing or software-as-a-service (SaaS) applications, offering companies a plug-and-play solution to their regulatory woes.

This process might look something like the following:

1. A regtech tool monitors transactions taking place online in real-time
2. This tool identifies issues or irregularities in the digital payment sphere
3. Outliers are relayed immediately to a financial institution, so they can analyze the transaction and determine if it represents a fraudulent transaction
4. This early-warning system allows institutions to identify potential threats at the outset, giving them valuable time to minimize risks associated with lost funds or data breaches

Emerging technologies like data analytics, artificial intelligence, and distributed ledgers fuel these regtech solutions, allowing them to collate relevant big data sets and analyze them using sophisticated algorithms.

How can Regtech work for me?

Not all regtech solutions are created equal – different software is coded to look for different things, so companies need to select the right suite of regtech solutions for their unique challenges.

Just a few of these options show the need for different applications:

• Account verification
  These applications help companies gather information about customers to prevent fraudulent accounts. Examples include Trunomi, a company that manages consent for personal customer data; or PassFort, which automates the collection and storage of data for due diligence.
• Monitoring
  Companies like IdentityMind Global provide risk management for digital transactions.
• Reporting
  Companies like Suade help financial institutions to compile and submit required regulatory reports.

These examples are just the tip of the iceberg. As maintaining compliance grows in complexity, regulation technology will rise to meet the challenge, and so too the regtech budgets must grow to help companies keep up with demanding regulations.

The Costs of Regulation

Regtech funding has increased steadily over the past few years. 2017 saw more than $1 billion invested in the space – triple the investment from the preceding five years. However, 2018 promises to dwarf these figures, with more than half a billion dollars invested In the first quarter alone.

Perhaps the motivation for investors digging into regtech has something to do with the high costs of neglecting it. US Bancorp was forced to pay $613 million in penalties for their flawed anti-money-laundering scheme and violations of the Bank Secrecy Act, while Commonwealth Bank of Australia shelled out more than $500 million for similar penalties.

Financial regulations can make or break a finance firm – and given the rapidly increasing number of regtech providers entering the space, it seems there’s no shortage of solutions for forward-thinking firms.