RegTech on the Rise

Regulatory Technology  also known as “RegTech”  is the use of cutting-edge technology to help companies address  their regulatory compliance more efficiently. 

RegTech is maturing quickly but is still in its formative years.  Today,  firms appear to be  scrambling to automate regulatory compliance wherever possible to keep up with ever increasing laws and regulations in the financial space.  RegTech firms are currently employing machine learning, natural language processing, blockchain, artificial intelligence, and other technologies in an effort to create a  digital transformation within the field of regulatory compliance. 

Regulatory compliance  is a crucial issue for all companies from mature well-established concerns to start-ups.   Developing solutions and business methods with enforcement in mind to reduce the likelihood of fines and lawsuits is now a business necessity.

The  emergence of new digitized regulatory methods begs  the question, “Is RegTech the new FinTech?”  The answer is no, but RegTech is an exploding area of FinTech.

Companies are increasingly turning to regulatory technology (RegTech) to assist them with the burden of complying with a myriad of laws, best practices, and compliance expectations. RegTech  platforms are engaged in collecting nuanced data, verifying it, and interpreting it in order to streamline regulatory processes.

The financial sector and especially banks have been burdened with an inordinate number of rules and regulations making it nearly impossible to keep pace with compliance demands utilizing  manual or near manual processes.  Additionally, many financial institutions have found their outsourced core provider systems rely on less nimble legacy technology that has not kept pace with current compliance demands.  This situation has given rise to new market entrants that are either standalone software solutions or create a bridge with the bank’s core operating system to deliver RegTech solutions.

RegTech financial solutions are currently playing major roles in many financial institutions.  The solutions can be seen in the area of lending including credit analytics, credit score cards, credit underwriting, portfolio monitoring, and many other credit related areas.  RegTech also plays a huge role in the compliance arena, including monitoring transactions for compliance with the Bank Secrecy Act, Know Your Customer rules, the Community Reinvestment Act, HMDA, and Fair Lending to name a few.  You get the picture, RegTech has permeated every facet of the banking industry due to the compliance burdens placed on the financial institutions and is now jumping into FinTech firms affiliating with banks or courting their customers.  RegTech not only speeds up the process of compliance, but it often times minimizes errors as well.

Relatively new RegTech companies  are now proliferating across the country and are frequent sponsors of industry tradeshows providing solutions in the areas of regulatory reporting, risk management, transaction monitoring, track and trace for cannabis, internal controls, wealth management, and IT monitoring.

Unfortunately for smaller asset sized institutions the burden of compliance is not any less than what is expected of larger institutions.  This means that they must comply with all the same rules and regulations as larger peers.  Gone are the days when one or two staff members might be able to address a small banks’ compliance requirements. Gone too are the days when  manual processes can keep up with the demand of compliance, hence the rise of RegTech to assist with the  pace and scale of the compliance. 

RegTech is visible everywhere in financial firms, appearing in  a variety of ways, each with different capabilities, but all with the same goal: to process more data in less time. The advantages of automated RegTech goes beyond speed. Regulatory infrastructure also uses industry-standard data formats to streamline data processing, resulting in safer data for faster and more reliable validation. 

The pandemic may have slowed adoption rates of RegTech in some areas of financial services, but it won’t be for long.   RegTech is at a pivotal point in its growth. The need for regulatory options in financial services has been shown all too plainly. The strength of the technology available brought to life by a flood of capital, is more than capable of meeting those needs. There are many advantages of RegTech, but its full potential can only be understood when it is fully and appropriately applied.