Regtech- Regulatory technology is a term used to refer to any and all technology designed to help financial services companies maintain regulatory compliance. Most solutions are focused on maintaining compliance with know your customer (KYC) and anti-money laundering (AML) regulations. The term is generally used as a subset of fintech, the blanket label for any technology used in the financial services industry. The main functions of regtech include regulatory monitoring, reporting, and compliance.
These solutions are usually based on artificial intelligence-powered applications that are built using machine learning technology. Since Lehman crisis in 2008, the volume of regulatory changes has increased manifold. To keep up, companies have increased their compliance staff as well as their compliance spends.
Regtech solutions are designed to enhance the abilities of compliance departments to monitor regulatory changes, monitor risk, generate reports, oversee billions of transactions, stay compliant and reduce the rate of false noncompliance alerts. As a result, regtech has the potential to be transformative in its reduction of compliance costs.
Maintaining regulatory compliance is costly and burdensome, so vendors have stepped up AI-driven efforts to improve the efficiency and effectiveness of compliance. Regtech applications provide several different functions to users, including risk management, identity management and financial crime identification.
Some of the key characteristics of Regtech are:
- Agility – cluttered and intertwined data sets can be decoupled and organised through ETL (Extract, Transfer Load) technologies
- Speed – reports can be configured and generated quickly
- Integration – short timeframes to get solution up and running
- Analytics – RegTech uses analytic tools to intelligently mine existing “big data” data sets and unlock their true potential e.g. using the same data for multiple purposes.
Complying with know your customer (KYC) and anti-money laundering (AML) regulations is a complex and expensive task for financial institutions. A study from Bain and Company estimates that 15-20% of a bank’s operational costs go to governance, risk and compliance, of which KYC and AML are a large portion.
Regtech is extremely important for financial services companies, who spend billions each year on compliance staff and software. The more efficient those regtech applications can make a compliance department, the more money the company can save, which means automating as many of the processes involved as possible. Some of them are:
- Risk management
- Transaction monitoring and reporting
- Customer identification and AML/KYC
- Regulatory intelligence
Good Regtech can enable companies to:
- Reduce compliance costs
- Stay up to date with regulatory landscape
- Reduce risk
- Improve customer retention
- Streamline processes
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’