RegTech has definitely become one of the areas to watch in 2017 and this trend is likely to continue in the years to come. Here are eight things you need to know.
1. What is RegTech?
RegTech, short for regulatory technology, is the use of new technologies to address compliance and regulatory challenges not only more efficiently but also more effectively. There are now numerous RegTech startups globally looking at tackling pain points, from know-your-client (KYC) and onboarding to compliance monitoring and fraud detection, using some of the latest technologies, from big data analytics to artificial intelligence.
2. Why is RegTech getting so much attention?
Since the global financial crisis, banks across Asia and globally have dealt with the numerous new regulations by hiring thousands of compliance officers, thus solving an important problem by adding costly headcount. This is particularly the case in Asia, where financial institutions often have to deal with more than a dozen different regulatory regimes, each with a different set of rules and requirements.
For example, a recent report stated that headcount costs represent around 80% of the anti-money-laundering (AML) budget for banks as many of these tasks are still being done manually by large teams of human AML teams. While complex cases may still require human oversight, many of the lower-risk checks could easily be handled by RegTech solutions, thus aiding banks in their cost and headcount reduction efforts.
3. Why is the RegTech industry moving so quickly?
Compared to FinTech, where there is an element of competition between banks, RegTech is an area in which everyone could win by cooperating. RegTech startups are almost all B2B offerings, which are not here to disrupt banks but rather to empower them. In addition, many financial institutions are happy to potentially cooperate with their peers if that would result in cost reductions for everyone.
The various KYC utility initiatives currently being discussed across Asia from Singapore to India – where a customer would need to go through the onboarding process only once and allow other banks to access that information – are great examples of banks coming together to explore models that would not only result in cost savings for banks but also substantially improve their customers’ experience.
4. What challenges are RegTech startups facing?
In addition to all the regular problems faced by any B2B FinTechs, from long sales cycles to lengthy procurement processes, RegTechs have to deal with the additional hurdles of increased I.T. and security approvals as they tend to touch on more sensitive banking areas such as risk or compliance.
Another frequent challenge faced by many of these RegTech solutions is that they are only as good as the data provided to them. For example, a bank can implement the latest artificial intelligence-powered solution, but if the data provided is noisy or inaccurate, then the output will not be insightful either.
5. What are the opportunities for Western RegTechs in Asia?
Globally, the RegTech industry is still relatively fragmented, with large number of small-scale players but no one player dominating the market yet. In Asia, it is still early days for the industry, with only a handful of RegTech startups providing mature products that can be used by financial institutions.
However, there is tremendous RegTech interest from banks in Asia due to the risk and cost-reduction benefits that it provides, especially in the complex and fragmented regulatory environment that is Asia. This presents a unique opportunity for Western-based RegTechs that have interesting solutions to come to Asia to try to service financial institutions in the region, using cities such as Hong Kong or Singapore as landing pads.
6. What do regulators think of RegTech?
It will come to no surprise that regulators globally have been encouraging the adoption of RegTech and in many cases becoming early clients themselves. For example, the Hong Kong SFC recently held a RegTech and FinTech Contact Day, which showcased emerging RegTech innovations and how they intersect with securities regulation.
Many of these RegTech solutions allow banks not only to streamline their reporting but also to have better oversight of their data. This makes it easier for regulators in the event they need time-sensitive information from a bank. In addition, unlike P2P platforms or robo-advisory solutions, RegTech startups generally do not need to be licensed, thus making it easier for regulators.
7. What will happen to regulatory and compliance jobs in banks?
While RegTech solutions will enable a reduction in headcount at banks, they are far from eliminating such roles entirely. Humans are still needed not only from a governance or policy perspective but also to tackle the more complex cases, where judgement and expertise are vital. However, RegTech solutions can tackle the less risky, high-volume, and time-consuming roles.
For instance, compliance teams are often given the tedious task of listening to and monitoring conversations between traders and their clients or manually reviewing email correspondence that contains certain flagged terms. RegTech solutions can perform such tasks not only more quickly or cost effectively but also more accurately. And unlike their human counterparts, such A.I.-backed solutions do not get tired, go on holidays, ask for a pay raise, or quit…
8. Is RegTech limited only to the financial services sector?
Unlike FinTech, which is focused mainly on the financial industry, RegTech has a broader reach that encompasses many other industries, from environmental and urban planning to pharmaceutical and finance.
For example, regulatory reporting across industries may be totally different in a couple of years as internet of things (IoT) devices and blockchain make on-demand, precise and almost live reporting potentially a reality in a broad range of industries from shipping to agriculture. This is of particular importance in China, for example, considering its important role in global trade or its recent focus on food safety.
We are really in the early stages of RegTech, especially in Asia. With investments in RegTech startups on the rise and the financial services industry becoming increasingly aware of its benefits, we should expect some clear market leaders to emerge in the coming years and the industry to mature.