How regtech can add real value to your business

The amount of reg­u­la­tion that finan­cial firms must com­ply with has explod­ed since 2009 with around 60,000 doc­u­ments pub­lished since then, accord­ing to regtech provider JWG. Com­pa­nies are now col­lec­tive­ly spend­ing bil­lions just man­ag­ing this bur­den. If they get it wrong, fines and cost of lost rep­u­ta­tion for non-com­pli­ance can run into yet more bil­lions.

Any­thing that reduces this bur­den will impact bot­tom lines sig­nif­i­cant­ly, which is why regtech solu­tions have swamped the mar­ket over the last few years.

Implementing regtech can cut costs and increase ROI

But cut­ting the cost of com­pli­ance and com­pli­ance fail­ures is just one way that regtech can help com­pa­nies increase com­pet­i­tive­ness; myr­i­ad oth­ers are emerg­ing. For exam­ple, mak­ing reg­u­la­to­ry process­es, such as know your cus­tomer (KYC) and anti-mon­ey laun­der­ing (AML) smoother can help avoid putting new cus­tomers off and there­fore con­vert more inquiries.

Analysing the data gath­ered in the process of com­pli­ance can add val­ue in many ways, such as tar­get­ing cus­tomer seg­ments more accu­rate­ly and man­ag­ing risk bet­ter.

Fin­tech plat­form Medici esti­mates that putting the ben­e­fits of effi­cien­cy and added val­ue togeth­er means a regtech imple­men­ta­tion can now typ­i­cal­ly promise a 634 per cent return on invest­ment over three years.

A report from con­sul­tant Deloitte sums up the oppor­tu­ni­ty and why so many firms have been slow to realise it. It says: “Regtech solu­tions pow­ered by emerg­ing tech­nolo­gies, such as blockchain, robot­ic process automa­tion and cog­ni­tive com­put­ing, offer trans­for­ma­tive poten­tial. These solu­tions reduce costs through com­pli­ance effi­cien­cies and deliv­er rich­er, faster insights and fore­sight into emerg­ing risks.

“How­ev­er, many organ­i­sa­tions are strug­gling to lever­age them. The mar­ket is sat­u­rat­ed with regtech firms and the choice of tech­nolo­gies can seem over­whelm­ing. Also some regtech firms approach the solu­tion from a tech­no­log­i­cal rather than strate­gic per­spec­tive. And many are in nascent stages, solve only a small com­pli­ance need and lack a deep under­stand­ing of finan­cial busi­ness­es.”

Regtech should not be approached as a box to tick

John Byrne, chief exec­u­tive at regtech provider Cor­lyt­ics, says: “Before the 2008 cri­sis, com­pli­ance was a small depart­ment in banks. They saw it as a tick-box func­tion, with a legal approach. But for many large firms, com­pli­ance costs are now between 5 and 10 per cent of rev­enue. They need to use tech­nol­o­gy to reduce these over­heads and improve out­comes with stake­hold­ers.

“Regtech can speed things up dra­mat­i­cal­ly, while also [adding val­ue to the stake­hold­er expe­ri­ence] and free­ing staff to do oth­er val­ue-adding things. So banks have to change. The trou­ble is they find it dif­fi­cult to roll out inno­va­tion as it requires extreme change-man­age­ment process­es.”

In future, banks will have more time to focus on using regtech for effi­cien­cy and adding val­ue rather than just com­pli­ance

Matthias Mem­minger, part­ner at con­sul­tant Bain & Com­pa­ny, says: “The recent €2.48-million fine of five Scan­di­na­vian banks for breach­ing cred­it rat­ing reg­u­la­tions has brought home that the biggest ben­e­fit of regtech is to elim­i­nate non-com­pli­ance risk.

“How­ev­er, it can add val­ue in many oth­er ways. For exam­ple, cre­at­ing a smooth, data-dri­ven onboard­ing or KYC process makes those expe­ri­ences more con­ve­nient and puts few­er new cus­tomers off. The data gath­ered can also enable you to make clear­er deci­sions about those that you take on and those you don’t.

“But regtech has tak­en off only in the last 18 months. For large glob­al banks, it’s hard to imple­ment regtech solu­tions on top of lega­cy sys­tems. They can work well if they have good data, but the chal­lenge is get­ting qual­i­ty data out of their sys­tems and work­ing with third-par­ty solu­tions. Small­er banks find this eas­i­er.”

There is a wide range of areas where regtech is adding value

Mr Mem­minger says this sit­u­a­tion should improve glob­al­ly as he pre­dicts finan­cial ser­vices have reached or are close to “peak reg­u­la­tion”. This means that in the future, banks will have more time to focus on using regtech for effi­cien­cy and adding val­ue rather than just com­pli­ance.

Bruce David­son, prin­ci­pal con­sul­tant at Altus, agrees that KYC, cus­tomer onboard­ing and AML are the areas where regtech has been adding most val­ue. Oth­ers include stock trad­ing, asset man­age­ment and track­ing asset allo­ca­tion lim­its, main­ly because they help lift the oner­ous bur­den of reg­u­la­tions such as the Revised Mar­kets in Finan­cial Instru­ments Direc­tive (Mifid II).

New tech­nol­o­gy that tracks new and exist­ing reg­u­la­tion helps map it to cor­po­rate strat­e­gy, and has also been suc­cess­ful, he says. These make sure com­pli­ance does not dis­tract com­pa­nies from their strate­gic goals and high­light areas where regtech could con­tribute to these goals, for exam­ple by enhanc­ing busi­ness intel­li­gence.

“The chal­lenge is these regtech sys­tems often need to share data with oth­er parts of the busi­ness and com­pa­nies strug­gle with that as the projects need­ed to achieve it are too big to coun­te­nance,” says Mr David­son.

“This is par­tic­u­lar­ly true while they also have to com­ply with new reg­u­la­tions such as the Gen­er­al Data Pro­tec­tion Reg­u­la­tion (GDPR) and Mifid II. It takes time to bed in regtech solu­tions, but now Mifid II and GDPR enforce­ment dates are behind us, it’s a good time to do that.”