The forces driving innovation in RegTech
In 2016, Deloitte declared that “RegTech was the new fintech”. Two years on, the driving forces behind that statement have snowballed, making RegTech the perfect candidate as the theme for this year’s Westpac’s Innovation Challenge.
What is RegTech and why RegTech now?
CB Insights (2018) defines RegTech broadly to include any technology and/or software created to address regulatory challenges and help companies understand regulatory requirements and stay compliant.
In the 10 years since the global financial crisis, the combative measures introduced by jurisdictions around the world have resulted in exponential regulatory obligations and a growing burden on financial institutions.
As the financial and reputational risks of non-compliance have been adding up, so too have the costs of managing these increasing obligations and firms’ resources are straining to keep up. For example, there are over 200 new regulatory alerts every day to stay on top of, and methods employed by financial criminals are becoming ever more sophisticated.
What are the driving forces behind the rise of RegTech?
- RegTech was born from the global financial crisis: the world responded to the GFC with a massive regulatory overhaul giving regulators more jurisdiction
- Data breaches are a highly visible problem: the industry is vulnerable to hackers, fraud and mismanagement and non-compliance continues to plague the industry
- A higher volume of regulation creates more gaps: with over 750 global regulatory bodies and 2,500 different compliance rule books, the volume of regulation has created more surface area for compliance gaps
- Fines are costly and reputations of firms are on the line: since the GFC, financial services firms have paid around 350 billion dollars in misconduct and mismanagement fines globally. But the cost of non-compliance is also reputational
- Paper processing is still relied upon in many organisations: throwing more process, more paper and more people at the problem just isn’t sustainable
But, smart solutions are here
Smart RegTech solutions employing the most advanced robotic process automation, artificial intelligence, machine learning and distributed ledger technology, are here to help financial institutions in their quest to stay compliant.
Borrowing from Deloitte’s ‘RegTech Universe’ classification, I conducted some research to explore five categories of RegTech problems, solutions and companies, from Australia and beyond; compliance, identity management, risk management, reporting and transaction monitoring.
Across each of these categories we can see technology growing in maturity. Early solutions that have helped companies to automate lengthy manual compliance processes are now evolving from the reactive to the proactive, and allowing companies and governments to predict future risks and even prescribe and carry out preventative measures.
Collaboration is key
Awareness and adoption of these smart solutions still has a way to go. Despite the promise of groundbreaking technology to solve such pressing problems, challenges and barriers exist on both sides of the fence. Financial institutions hit a wall when attempting to integrate back to the core, with legacy systems not always in the best condition to ‘plug and play’ with RegTechs.
On the other hand RegTech vendors struggle to gain access to client-side RegTech evangelists that are bold enough to try new approaches. Yet then even if a changemaker tries to get a RegTech pilot off the ground, they might find themselves blocked by procurement pathways that aren’t fit for purpose.
Look out for my next post where I’ll explore the problems RegTech solves and the varied solutions available. In the meantime, if you are a RegTech start-up or scale-up you may wish to consider applying to be a part of this year’s Westpac Innovation Challenge.
