Business

AI & RegTech’s Role in Helping You Automate Regulatory Compliance

By its nature, it’s a never-ending cycle. Something bad happens, regulators bring in new regulations. Technologies evolve, regulators create rules to regulate them. A company goes down, regulators consider how to prevent the same thing from happening next time.

Keeping up with compliance is a costly and time-intensive job for any financial institution. In fact, figures published by the Wall Street Journal showed that: “New regulation stemming from the financial crisis has cost the six largest U.S. banks $70.2 billion as of the end of last year.” This was back in 2014, and the costs have only risen.

In 2017, S&P Global Market Intelligence published that their research showed compliance costs were up at least 20% for many U.S. banks. More recently, a study in 2022 showed compliance costs in North America were up a further 13.6% over costs in 2021.

While costly, regulatory compliance is also extremely important. Doing it right can help create more long-term customer loyalty and enhance your brand affinity. Doing it wrong can result in negative press releases and even fines.

This article outlines what RegTech is and how it can help you deliver on regulatory compliance. I’ll also dive into AI’s role in regulation, and how it can help automate some of the laborious processes involved. I’ll touch on some of the best AI and RegTech use cases you can start exploiting today to help you streamline and simplify your regulatory compliance processes.

Get your regulatory compliance ship-shape with AI

What is RegTech?

RegTech, short for regulatory technology, refers to the use of innovative technologies to streamline regulatory compliance processes in the financial services industry.

With the financial industry facing increasing regulatory pressure to comply with a growing number of rules and regulations, there’s been a rise in the emergence of RegTech companies that offer software solutions, data analytics tools, and other technologies to help financial institutions comply with regulations more efficiently. In fact, “According to a MarketsandMarkets report, the global market for regtech is expected to reach $55.28 billion by 2025.”

RegTech solutions are designed to automate compliance processes, reduce costs, and improve risk management. These technologies can help financial institutions stay up to date with regulatory changes, identify and mitigate risks, and improve the overall effectiveness of their compliance programs.

What Role Does AI Play?

AI is one of the key drivers of RegTech, helping improve and evolve many of the relevant technologies. AI helps make predictions, identify patterns, analyze and review large swaths of data, and monitor behaviors.

When mixed together with RegTech, or used to power certain aspects of RegTech, AI helps automate many of the frustrating, time-consuming manual processes usually required to manage regulatory compliance.

But what jobs does that leave humans with?

Is AI Going to Steal the Jobs of Those Responsible for Managing Regulatory Compliance?

Whenever the word automate shows up in a few too many articles or media pieces, people start worrying about their jobs. This was true when Edison created the lightbulb and 25,000 lamplighters went on strike, and it’s true today when almost everyone on LinkedIn is talking (or worrying!) about Chat GPT.

Whichever side of the Chat GPT fight you fall on, one thing has been clear to us in the banking field for many years; technology innovations that facilitate automation will not steal jobs, they will evolve, change and enhance them.

This is clear from the fact that, while AI is having its moment in the spotlight today, the truth is it has been around for decades. Along with AI, we’ve had several other automation-powering innovations in the last two decades, and while the way we work has changed, unemployment in the USA is only at 3.6%, with tech unemployment coming in at only 1.5%. It’s clear that while AI and automation-based technologies have impacted how we work, people still have jobs, and they are predominantly happy with those jobs.

The same is true for regulatory compliance.

AI is a tool. Its best application, and when it does its best work, is when it’s used by humans to help them better perform their duties. Often, AI itself can’t be audited, and a human is still needed to make final decisions. So, what can it help with?

The Best Ways RegTech and AI Can Be Leveraged to Help Automate Regulatory Compliance

AI and RegTech have lots of great potential uses. Here are just a few.

Flag Upcoming Regulatory Changes

AI doesn’t need to sleep, which means if set up correctly, it can consistently monitor documents, the web, and any information released by regulatory bodies for the purpose of flagging any potential regulations leadership teams need to be aware of.

It can also take large bodies of information and condense them down, highlighting the important bullet points, so key actions that need to be taken aren’t lost in a sea of information.

Automate KYC

With everyone moving remote, KYC checks had to change. Today, it’s possible to manage KYC compliance entirely online, but that still leaves team members with a huge amount of work. In some cases, identity checks and management can even get in the way of efficiently onboarding new customers.

AI and RegTech can help automate KYC in a number of ways, by powering the use of facial recognition software, performing customer due diligence, recognizing identification documents, and automatically collecting data to help create a holistic profile. This faster, more streamlined version of onboarding can help improve the customer experience and attract more long-term customers.

Streamline AML

AI and RegTech can scour a range of sources to help track transactions and prevent money laundering. It can also help reduce false positives, which account for approximately 42% of all AML alerts, and are predicted to cost companies over $3 billion a year. AI can help analyze past behavior automatically, and compare that to current behavior, to help flag any potential changes that might signal possible money laundering.

Create Dashboards

AI and RegTech can help create compliance dashboards to streamline and simplify risk awareness. Sometimes, risk management professionals have so many things going on, and so many places they’re checking, they can miss a fire going on somewhere else. RegTech coupled with AI can help create and update easy-to-digest dashboards designed to help risk teams monitor and prevent risks by centralizing data.

Predict Potential Violations

Track past and current data and predict potential compliance violations both internally and from any clients against the firm. Depending on the data your AI tool is able to access, it may be able to learn from mistakes other bodies have made and ensure your company doesn’t make any similar violations. This goes a long way in stopping fines before they even happen

Monitor Transaction

By monitoring transactions and analyzing historical data, AI can identify patterns of behavior that may indicate fraudulent activity. By setting a threshold and using a scoring system to determine alerts, AI can produce a score that reports the probability that a group of transactions is inconsistent with previous patterns of activity, helping to detect fraud.

Test, Test, Test

AI can help test any systems you have in place, including stress test models. This ensures you can test a wide variety of scenarios, so if regulators ever come knocking, your processes and systems will pass with flying colors.

What Could Be Standing in the Way?

AI and RegTech can be used today to start automating time and labor-intensive parts of regulatory change management. However, there are some areas that need to be considered carefully, by individual companies and the industry as a whole, when implementing a new system. These include:

  • Customer Data Protection

    Customers are more concerned than ever about how and where their data is being used. Outlining clear guidelines for AI to follow about what data it can and can’t access is key.

  • Siloed Data

    The bigger the financial institution, the more data they have available. This means their AI models may be more advanced than those available to smaller institutions. One way smaller firms can combat this is by leveraging open banking and open APIs.

  • Regulating RegTech

    Companies might want to keep an eye on any possible upcoming regulations which dictate how and when AI and RegTech can be used.

  • Integrating Legacy

    It’s important to consider how you integrate newer, fresher technologies into legacy systems. Each case is unique, in some cases it makes sense to create bridges between the two, sometimes you might want to update the legacy system, in other cases, you might want to leverage RegTech separately.

Exadel: Your Key to Start Leveraging AI and RegTech Today

At Exadel, we’ve been building AI tools and helping financial institutions manage their regulatory compliance requirements for over a decade. If you’re considering leveraging RegTech or AI to help you manage compliance, we’re your guys.

We’ve created AI-powered; open-source facial recognition software, highly accurate prediction models for the financial markets, document processing tools, stranger recognition software, and more. We can create customized, unique RegTech and AI products designed to help boost your bottom line, reduce your compliance costs, and streamline and speed up regulation management.

When building out AI and RegTech products, we’ll start by learning about your business, then we’ll collect relevant data, transform that data in a format AI models can understand, create a tool you’ll be proud of, test and evaluate it and make any required improvements, then finally, we’ll deploy so your regulation team can take real advantage of it.

We don’t just create and build. We also consult and help our clients make informed, smart decisions based on data and business intelligence, so we can help you decide where and how to use AI and RegTech.

Get in touch today to start simplifying and streamlining your regulatory compliance requirements.