Business
Report: RegTech for Banking and Financial Services in 2023
The finance industry is one of the most regulated sectors. From anti-money laundering (AML) and know-your-customer (KYC) requirements to data privacy laws and complex reporting standards, financial institutions face a host of regulatory obligations that can be difficult and costly to manage.
The regulatory technology (RegTech) industry has emerged to cope with the regulatory pressure. RegTech offers innovative technologies that simplify and optimize compliance procedures in various ways.
This article explains RegTech and why it is crucial for financial institutions. We will also talk about how RegTech solutions can help financial services to ensure regulatory compliance and what benefits they can get from it.
RegTech in Financial Services: Key Numbers to Consider
- Banks spend up to 10 percent of their revenue from operations on compliance-related activities, the equivalent of about $250 billion (USD) worldwide (Cost of Compliance Report 2022, Thomson Reuters)
- The RegTech market is forecasted to grow from $7.6 billion in 2021 to $19.5 billion by 2026 (Markets&Markets)
- Financial institutions’ global spending on RegTech is expected to reach $127 billion by 2024. (Juniper Research)
- Account takeover and identity fraud caused a loss of $16.9 billion to financial institutions in 2019.
- The RegTech market is projected to soar to $57.5 billion, growing 8.2% from 2022 to 2032.
- In 2022, the RegTech sector received $18.6 billion in venture capital, private equity, and M&A investments, a significant increase from $11.8 billion in 2021. (Statista)
What is RegTech and How Does It Work?
RegTech, short for regulatory technology, is the use of advanced technologies to simplify regulatory compliance procedures in any industry that is exposed to regulatory requirements. RegTech is involved in the areas with the highest load, specifically in reporting preparation, customer identification procedures, and risk management.
RegTech is based on automation. After the financial crisis in 2008, the number of regulatory changes increased significantly. The amount of data which banks needed to process was huge and hard to track manually. RegTech filled that gap and provided machine learning and predictive analytics tools to prevent fraudulent activity.
RegTech companies work in conjunction with regulators, and cloud computing facilitates the exchange of information between private RegTech companies and the government agencies that use their services.
RegTech solutions are being adopted in different sectors such as healthcare, energy, and telecommunications. For example, RegTech applications ensure compliance with data privacy regulations in healthcare or monitor compliance with environmental laws in the energy industry.
However, nowadays the financial services industry is the main consumer of RegTech solutions.
What is RegTech for Financial Institutions?
Banks and financial institutions adopt RegTech solutions to meet regulatory compliance requirements. It is important to note that regulators also use RegTech to monitor compliance with regulatory requirements.
Regtech companies work with financial services by using artificial intelligence, cloud computing, and big data to share information quickly and securely.
AI technologies are an essential part of RegTech. AI solutions operate with big amounts of data, make predictions and identify patterns. AI & RegTech for financial institutions cope with two significant areas: KYC regulations and AML obligations. These technologies effectively monitor transactions, predict potentially fraudulent activities, help to create compliance dashboards, and test any systems.
AI is also important for the digital onboarding process, whether automatic identity verification with selfie onboarding or creating and verifying identities using KYC data.
Adopting AI & Regtech solutions in banks will lead to over $460 million in cost-savings in 2020-2025 (according to Juniper research).
The RegTech industry in 2023 could be influenced by inflation, economic deceleration, and notable instances of financial misconduct and inadequate risk management.
FinTech, RegTech, SupTech: What’s the Difference?
FinTech, short for financial technology, is the use of technology that helps to optimize and digitize traditional financial services.
RegTech is often wrongly considered to be a subset of FinTech. In fact, it is applied to broader industries, such as energy, aviation, pharmaceutical, gaming, and healthcare.
FinTech growth has been led by startups (which are increasingly partnering with or being acquired by banks and other traditional financial institutions). At the same time, RegTech development is primarily a response to the huge costs of meeting new institutional requirements of regulators and policymakers.
SupTech, short for supervisory technology, refers to technology supporting supervisory authorities in controlling and monitoring specific industries. RegTech, on the contrary, can provide technology solutions to both financial institutions and regulators. Therefore, some assume SupTech to be a subset or subcategory of RegTech.
Despite the fact that RegTech and SupTech have similarities and use similar technologies, their focus is different. RegTech focuses on helping financial institutions comply with regulatory requirements, while SupTech is aimed at assisting regulators in supervising and monitoring financial institutions.
How Did RegTech for Financial Services Spring to Life?
RegTech came about as a result of several factors.
1. The financial crisis of 2008 led to an explosion of new regulations.
The global crisis of 2008 affected the whole financial sector. The surviving banks were forced to focus on meeting constantly appearing regulatory standards. Huge sums of money were spent aligning with the new regulations. It had a significant negative impact on the profitability of banks. Banks needed automation to handle the new regulations, so the RegTech companies came into play.
2. The need to replace manual compliance tasks with automation.
Fast technological innovation in recent years has helped financial institutions streamline their compliance processes and reduce costs by replacing manual work with automation.
Regulated institutions can automate workflows to meet regulatory requirements, while regulators may use RegTech solutions to automate manual tasks and workflows that align with legislation.
3. High levels of competition in the FinTech sector requires agility and adaptability.
The rise of FinTech companies increased competition in the financial industry, with many new players entering the market and disrupting traditional business models. Financial institutions needed to be more agile and adaptable to stay competitive, which has driven demand for RegTech solutions.
4. Digital transformation is fueled by COVID-19.
The pandemic forced companies to embrace digital transformation, and excessive digitization brought new regulatory changes and requirements. The necessity to adapt to digital changes and compliance requirements has further spurred the growth of RegTech startups in the financial industry.
How is RegTech Used in Banking and Financial Services?
RegTech solutions are used across various banking and financial services functions, including regulatory compliance and reporting, risk management, online identity verification, transaction monitoring and auditing processes.
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Regulatory Compliance
Dealing with regulatory compliance is the main reason that led to the RegTech boom. Automation, cloud computing, and big data help financial institutions simplify regulatory processes.
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Regulatory Reporting
RegTech solutions can alert banks about real-time regulatory reporting changes so they can meet their reporting obligations and stay compliant with regulatory requirements. Financial institutions can automate the process of gathering and providing their data to meet compliance requirements, making it less costly and time-consuming.
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Risk Management
RegTech solutions can identify and manage risks before they happen. By analyzing scenarios based on past activity and behavior, Regtech software can monitor high-risk cases and forecast possible fraud activities.
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Online Identity Verification
RegTech solutions can help financial institutions identify and verify customer identities more accurately and faster. For example, Regtech software verifies data about individuals by using KYC procedures. The RegTech tools may also analyze handwritten text and speech to verify a person’s identity. It brings an additional level of security to the digital identity verification process.
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Transaction Monitoring and Auditing Processes
Transaction monitoring is another area where RegTech is making a significant impact. With the rise of alternative payment methods like cryptocurrencies and peer-to-peer (P2P) platforms, financial institutions face new challenges when monitoring transactions for fraud activities.
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What Challenges Do Financial Institutions Face to Adopt RegTech?
Despite the fact that RegTech offers great solutions, there are a number of challenges holding back its widespread adoption.
1. Dealing with Legacy Systems
A common challenge is an inability to integrate modern technological solutions into legacy systems. Financial institutions must thoroughly audit their current systems and technologies and modernize outdated ones to resolve the problem of insufficient digital infrastructure.
2. Finding and Hiring the Right Talent
Finding and hiring talent is not a new problem for the financial services industry, but is consistently overlooked. However, the difficulty in finding the right talent may be less due to a lack of talent and more to a lack of knowledge about where to find it.
More about IT staff augmentation for financial services.
3. Lack of Tailored Outsource Strategy
Finding reliable partners is essential for business flexibility, and here the traditional approaches to outsourcing need to be revised. An alternative way is to put effort into strategic outsourcing. It is a customized outsourcing strategy based on developing partnerships and collaborations globally.
To create such a strategy, FS providers need to use more than one type of outsourcing, like reshoring (outsourcing partners within the provider’s home country and region rather than abroad), nearshoring (partners that are located nearby), and friend-shoring (partners located in countries and areas allied with their home countries).
Looking for a reliable partner in finance?
Learn more about friend-shoring outsourcing strategy.
4. Data and Cybersecurity Threats
RegTech solutions often store sensitive company data, so RegTech firms need to ensure that data is protected under current cybersecurity best practices. Because these guidelines are updated regularly, RegTech firms must keep a close eye on changes and adjust the software as needed.
Ultimate Guide to RegTech for Financial Services in 2023
The Exadel Financial Services team has prepared a report on RegTech in financial services. It defines RegTech in financial services, use cases and market trends as well as covering benefits and challenges. If you want to adopt RegTech solutions in your financial institutions, check the insights mentioned in the report.
Summary
- RegTech manages regulatory compliance well in financial services, but smaller companies may need more support in adopting and implementing solutions without overburdening their resources.
- Big Data, APIs, and NLP RegTech applications can enhance operational efficiency and reduce regulatory burden in Governance, Risk Management, and Regulatory Compliance.
- To successfully implement and manage RegTech, FS should prioritize tailored RegTech solutions, look for near-shore RegTech providers, and find a RegTech provider specializing in compliance.
- The top places to find RegTech specialists include the UK, Ireland, and Lithuania.
Why RegTech for Financial Services?
- RegTech helps financial service providers improve compliance, security, onboarding processes, customer experiences and reduce costs.
- To simplify the complexities of compliance by enabling automation for data distribution, big data analytics, cloud computing, and real-time insights.
- The most common use cases for RegTech for financial services are regulatory reporting, risk management, identity management and control, regulatory compliance, transaction monitoring and auditing.
Deloitte released its report RegTech – Gaining Momentum.
Conclusion
The scope and extent of financial regulations are expected to grow. Financial institutions will have to invest in technology and skilled personnel to effectively interpret, apply, and enforce these regulations.
RegTech for financial services offers innovative solutions for banks and financial organizations to comply with regulatory requirements. Financial institutions that adopted RegTech have saved a lot of time and money.
Financial institutions should partner with reliable RegTech companies to stay competitive and manage resources effectively. Exadel’s tailored regulatory services for the financial services industry offer centralized data, enhanced risk reduction, lower operational expenses, automation, emerging technologies, as well as design and engineering services.