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?
This process might look something like the following:
- A regtech tool monitors transactions taking place online in real-time
- This tool identifies issues or irregularities in the digital payment sphere
- Outliers are relayed immediately to a financial institution, so they can analyze the transaction and determine if it represents a fraudulent transaction
- 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.
Companies like IdentityMind Global provide risk management for digital transactions.
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.
How Americans Make and Spend Their Money
These charts break down how Americans get their income, as well as where that money goes, based on different income groups.
How do you spend your hard-earned money?
Whether you are extremely frugal, or you’re known to indulge in the finer things in life, how you allocate your spending is partially a function of how much cash you have coming in the door.
Simply put, the more income a household generates, the higher the portion that can be spent on items other than the usual necessities (housing, food, clothing, etc), and the more that can be saved or invested for the future.
Earning and Spending, by Income Group
Today’s visuals come to us from Engaging Data, and they use Sankey diagrams to display data from the Bureau of Labor Statistics (BLS) that helps to paint a picture of how different household income groups make and spend their money.
We’ll show you three charts below for the following income groups:
- The Average American
- The Lowest Income Quintile (Bottom 20%)
- The Highest Income Quintile (Highest 20%)
Let’s start by taking a look at the flows of the average American household:
The Average American Household – $53,708 in spending (73% of total income)
The average U.S. household has 2.5 people (1.3 income earners, 0.6 children, and 0.4 seniors)
As you can see above the average household generates $73,574 of total inflows, with 84.4% of that coming from salary, and smaller portions coming from social security (11.3%), dividends and property (2.6%), and other income (1.7%).
In terms of money going out, the highest allocation goes to housing (22.1% of spending), while gas and insurance (9.0%), household (7.7%), and vehicles (7.5%) make up the next largest categories.
Interestingly, the average U.S. household also says it is saving just short of $10,000 per year.
The Bottom 20% – $25,525 in spending (100% of total income)
These contain an average of 1.6 people (0.5 income earners, 0.3 children, and 0.4 seniors)
How do the inflows and outflows of the average American household compare to the lowest income quintile?
Here, the top-level statistic tells much of the story, as the poorest income group in America must spend 100% of money coming in to make ends meet. Further, cash comes in from many different sources, showing that there are fewer dependable sources of income for families to rely on.
For expenditures, this group spends the most on housing (24.8% of spending), while other top costs of living include food at home (10.1%), gas and insurance (7.9%), health insurance (6.9%), and household costs (6.9%).
The Highest 20% – $99,639 in spending (53% of total income)
These contain an average of 3.1 people (2.1 income earners, 0.8 children, and 0.2 seniors)
The wealthiest household segment brings in $188,102 in total income on average, with salaries (92.1%) being the top source of inflows.
This group spends just over half of its income, with top expenses being housing (21.6%), vehicles (8.3%), household costs (8.2%), gas and insurance (8.2%), and entertainment (6.9%).
The highest quintile pays just short of $40,000 in federal, state, and local taxes per year, and is also able to contribute roughly $50,000 to savings each year.
Spending Over Time
For a fascinating look at how household spending has changed over time, don’t forget to check out our previous post that charts 75 years of data on how Americans spend money.
Stock Market Returns Over Different Time Periods (1872-2018)
In any given year, the stock market can be a crapshoot – but over long periods of time, the U.S. market has consistently performed for investors.
Putting hard-earned money in the stock market can make some people nervous.
It’s well known that a correction can occur at any time, and the fear of market crashes can make even the most seasoned investors to make questionable decisions.
While it’s true that putting your money on the line is never easy, the historical record of the stock market is virtually irrefutable: U.S. markets have consistently performed over long holding periods, even going back to the 19th century.
Market Performance (1872-2018)
Today’s animation comes to us from The Measure of a Plan, and it shows the performance of the U.S. market over different rolling time horizons using annualized returns.
Note: The animation uses real total returns from the S&P Composite Index from 1872 to 1957, and then the S&P 500 Index from 1957 onwards. Data has been adjusted for reinvestment of dividends as well as inflation.
Using just one-year intervals of time, the market can be a crapshoot. Unfortunately, if you were to just choose a one-year period at random, there would be a significant chance of losing money.
However, as the timeframes get longer – the animation goes to 5-year, 10-year, and then 20-year rolling periods – the frequency of losses rapidly decreases. By the time you get to the 20-year windows, there isn’t a single instance in which the market had a negative return.
Why Time Matters
Over 146 years of data, the chance of seeing negative returns for any given year is about 31%.
That fact in itself is quite alarming, but even more important to note is the distribution of returns in those down years. As you can see in the following chart also from The Measure of a Plan, it’s not uncommon for a down year to skew in the high negatives, just as it did during the crisis of 2008:
According to the data, there have been 10 individual years where the market has lost upwards of 20% – and while those off years are greatly outnumbered by the years with positive returns, it makes it clear that timeframe matters.
Past performance obviously doesn’t guarantee future results, but the historical track record in this case is quite robust.
Long-term investors can see that as long as their time horizon is measured in the decades, you can take the odds of making money in the stock market to the bank.
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