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RegTech in the Financial Industry: Solutions, Services & Benefits

As a result of the global financial crisis, a steady stream of regulatory updates has forced financial institutions to allocate a massive share of their resources to compliance. According to a survey by Duff & Phelps, banks spend 4% of their total revenue on compliance, and this number is expected to grow to 10% by 2022. More than that, 12 of the top 50 banks in the world were fined for non-compliance in 2019. In December 2019, global penalties for non-compliance with Anti-Money Laundering (AML), Know your Customer (KYC), and sanctions regulations amounted to $36 billion. How can your financial business thrive in such circumstances? RegTech is rising to meet this challenge.

In this post, we’ll take a close look at RegTech and how it assists financial institutions in compliance and risk management.

What is RegTech?

A subfield of FinTech, Regulatory Technology or RegTech is an umbrella term referring to any technology that is designed to help financial institutions comply with regulatory requirements set by SEC, FINRA, FATF, and other regulatory bodies. Operating as cloud computing or software-as-a-service applications, regulatory technologies offer companies plug-and-play solutions against their compliance woes. The main purpose of RegTech is to reduce regulatory costs and release resources for business-related tasks.

As a meeting point between regulation and technology, RegTech takes advantage of the latest technologies. Here are just a few of them:

  • Cloud computing. Since regulatory requirements are frequently updated, financial institutions have to be more flexible. Cloud computing gives this flexibility by establishing standardized shared utilities that are managed by third parties. As new regulatory amendments come into force, applications can be easily updated without costly release processes.
  • Blockchain. Slow data exchange is one of the major challenges that hinder timely fraud prevention in the financial industry. Blockchain is perfect for data recording and exchange between financial firms, as well as financial firms and regulators. On top of that, with its ability to identify and prevent fraudulent activities, blockchain is helpful in monitoring transactions.
  • Machine learning. The ability to identify patterns in data silos can be particularly useful in risk management. This especially applies to screening customers for creditworthiness and potential business partners for reliability.
  • Big data, data mining & analytics. Machine learning cannot bring much value without big data, data mining, and analytics. Due to their ability to track suspicious activities holistically and in real-time, these technologies are increasingly being adopted in complex financial crime prevention.

RegTech against Money Laundering

Non-compliance with financial regulations is expensive. For example, U.S. Bancorp has paid more than $600M in penalties for their flawed anti-money laundering policy. Meanwhile, AML compliance costs hit $25 billion annually.

Why? Here’s what the entire process looks like. The system triggers an alert every time suspicious activity is detected. The compliance team scrutinizes all these alerts. While investigating each case for potential money laundering can cost up to $24,000, usually, 9 of 10 alerts are false alarms.

Leveraging the power of machine learning and the ability to crunch large volumes of data, RegTech solutions can reduce false positives. At the same time, these technologies can streamline the laborious process of investigation. While AML analysts spend 90% of their time collecting the needed data on a particular case and only 10% analyzing it and making decisions, regular technologies can flip these figures over.

RegTech Services

Though most solutions revolve around ensuring abidance by KYC (Know Your Customer) and AML rules, RegTech spans across all aspects of risk and compliance management. These include ID verification, transaction monitoring, risk analysis, data management, reporting, cybersecurity, and regulatory challenges. Let’s take a closer look at each of the cases.

ID Verification

The client’s identity is closely related to money laundering prevention issues. According to FATF recommendations, the process of ID verification implies collecting and analyzing large amounts of personal information. Furthermore, regulators require financial institutions to apply a risk-based approach to their clients. For example, politically exposed persons and individuals from higher-risk countries are subjected to a more robust level of screening and can have a limited number of transactions. All this makes the entire procedure quite complex to financial institutions.

Regulatory technologies can not only streamline the customer and vendor screening process but also make it more detail-oriented. Driven by the power of machine learning and natural language processing, RegTech can also extract information from oral speech and written text. This allows FIs to detect fraud even during telephone conversations or when checking the documents for authenticity.

Monitoring

According to FATF, FIs should file reports on suspicious transactions promptly. 100% compliance is impossible with traditional monitoring methods, which imply analyzing only small portions of data. On the contrary, ML-powered RegTech solutions allow banks to conduct continuous monitoring of all transactions in real-time, making timely and accurate alerts on suspicious activities.

Risk Analysis

The use of regulatory technologies suggests efficient risk management: powered by machine learning and the ability to process large data chunks, RegTech solutions can analyze different scenarios and forecast possible outcomes in a timely manner. Based on data analysis conducted by regulatory technologies, financial institutions will be able to predict fraudulent activities instead of just looking for them.

Data Capture, Integration, and Reporting

As regulatory requirements continue to grow in number and become more complex, financial institutions have to collect, store, and analyze more and more data for different purposes, from customer screening to making predictions.

Besides, from the regulator’s point of view, if something isn’t documented, it didn’t happen, meaning that compliance implies lots of submissions. RegTech can automate information collection and processing, summarizing everything in reports that correspond to the standards of the regulatory authorities.

Regulatory Intelligence

One of the key challenges of compliance management is frequent changes in legislation. Coupled with the fact that regulatory documents are usually voluminous, staying compliant requires additional time and resources. RegTech solutions can track and adopt regulations in a way applicable to the given business, visualize findings, and even train staff on compliance obligations.

One of such solutions that can help you automate governance, risk and compliance processes is Infopulse Standards Compliance Manager. SCM helps implement a set of pre-integrated standards, configurable GRC features, intuitive UI, and real-time data visualization. The solution allows consolidating all data in a single place providing access to all people responsible for compliance and data protection. Thus, it allows improving data visibility, asset management, facilitating compliance and risk management processes. Moreover, by using the compliance tool, you can optimize your preparation for any certification you need.

Benefits of RegTech

As you can see, each RegTech solution is designed to serve a specific purpose. Since compliance and risk management is a complex process, combining several RegTech technologies is critical. If utilized properly, regulatory technology solutions are a lifesaver for every financial institution.

According to Raconteur, integrating RegTech into every aspect of compliance management offers the following benefits:

  • Automation and streamlining processes
  • Risk reduction
  • Increased transparency
  • Cost-cutting
  • Enhanced resilience to cyberthreats
  • Effective fraud identification
  • Boosted efficiency
  • Increased agility

Conclusion

To financial institutions, staying compliant with rapidly changing regulations implies collecting and managing massive volumes of data. If they fail to meet these guidelines, steep fines are inevitable. As a result, companies are forced to spend one-fifth of their operational costs on compliance management while sacrificing customer engagement and business growth.

Fuelled by machine learning, cloud computing, big data analytics, and blockchain, regulatory technologies help to carry out risk and compliance management more efficiently. They streamline a broad range of processes, including ID verification, transaction monitoring, data management, reporting, and beyond. If used properly, RegTech can improve the internal organization of a company and increase its competitiveness.

If you need help to leverage the most of benefits from RegTech adoption, Infopulse experts in banking and finance solutions will gladly assist you in all development and implementation stages. Contact us today to find more information.

About the Author

Oleksandr Nikolaienko has 20 years of overall IT experience, 15 years of which he dedicated to project management and business analysis. He contributed to the development and delivery of financial software, risk management solutions, internet and mobile banking solutions. He has proven expertise in managing the entire portfolio of projects in FinTech, Logistics, and Telecom. Oleksandr is a highly qualified expert having earned such international certifications as Project Management Professional (PMP)®, Certified ScrumMaster® (CSM), Certified SAFe 4 Agilist® (SA), and ICAgile Certified Professional – Delivery at Scale (ICP-DAS).

Oleksandr Nikolaienko

Head of FinTech Practice

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