As financial organizations digitize their operations to operate more efficiently and provide better service, the regulatory ecosystem is growing more complex. Instead of backing away from technology to handle the increasing compliance burden, financial institutions are doubling down on advanced software solutions to ease the load.
The software they’re using is called Regulation Technology, or “RegTech,” for short. It’s fast becoming one of the best ways for financial organizations to stay on top of compliance obligations and reduce regulatory risk.
What is RegTech Anyway?
RegTech is technology that handles compliance processes for businesses. It comprises a range of tools and applications enabled by big data processing capability, Artificial Intelligence (AI), and machine learning that help organizations monitor, understand, and comply with regulations. Many RegTech tools automate repetitive tasks that compliance and risk teams have traditionally performed manually.
Compliance is among the most important considerations for financial companies. Organizations are required by law to observe customer data privacy and data security regulations. They also need to secure themselves and their customers against fraud and cybercrime and comply with anti-money laundering and anti-terrorist financing laws. Apart from governmental regulations, financial companies need to observe ethical and sustainability standards on investments, insurance, and general operations. Strong compliance practices don’t only help businesses avoid fines and penalties, they’re essential to gain and maintain customer trust, to develop a positive brand reputation, and to stay competitive.
RegTech tools relieve the compliance burden in all these areas by simplifying, streamlining, and automating these tasks for compliance teams. For example, RegTech software can accelerate and secure online account applications for banks and credit card companies by running sophisticated verification tests on scanned ID cards submitted by customers. The process protects the organization and makes applying for cards faster and easier for busy clientele.
RegTech Solutions for Every Compliance Area
RegTech is an umbrella term for a wide variety of digital solutions and applications that harness advanced processing functionality for greater efficiency. Here are some of the key areas in which financial service providers are deploying RegTech for risk management.
Monitoring: RegTech monitoring tools use advanced analytics to detect and protect against fraudulent or unusual transaction activity and ensure transactions are conducted according to regulations.
Reporting: RegTech software helps financial organizations fulfill their reporting obligations by automating, standardizing and accelerating the reporting process. It gathers and processes internal information and submits it to the necessary authorities in line with requirements and schedules.
Legal and regulatory analysis: These tools gather, store, and interpret regulatory documents that pertain to an organization’s activities. Gathering relevant legislation in one place and ensuring it’s automatically updated helps employees stay compliant by keeping informed, identifying risks and gaps, and updating company policies.
Compliance management: Compliance management platforms and dashboards manage company policies, keep track of compliance workflows, procedures, and processes, and contain forecasting and risk modeling tools.
Data protection: This critical set of RegTech tools responds to increasingly stringent data privacy legislation by protecting customer data and preventing cyberattacks.
Client identification: RegTech client identification tools gather and authenticate client information and conduct background and credit checks to assess customer risk profiles.
As organizations deploy RegTech solutions for discrete tasks, RegTech developers identify more areas to address – especially as regulation continues to evolve. It’s no surprise the market is soaring. With spending already at $33 billion in 2020, Jupiter Research projects a 290% growth spurt to reach $130 billion by 2025.
It costs a lot to keep risk and compliance departments staffed and trained and to ensure compliance actions reach every corner of the business. Employees can’t be expected to read and understand every new piece of legislation that comes down the pipeline on top of their regular workflow. RegTech tools that analyze legislation and alert staff to pertinent new rules save time. They free compliance employees for high-level tasks and help accomplish compliance work with greater efficiency.
Financial organizations also gain precision, accuracy, and thoroughness by using RegTech monitoring and reporting tools. The fact is, people make errors, neglect details, and overlook items that machines don’t. When it comes to verifying and reporting numerical data or detecting suspicious transaction activity, AI-enabled RegTech software outperforms people – usually at lower cost.
While RegTech solutions can be a considerable investment, the benefits pay off in the long run. RegTech solutions deployed company-wide can improve internal business processes by connecting risk management areas across an organization. When policies and mechanisms unite to foster a strong compliance culture, the result is enhanced trust from partners, customers, and the industry.
RegTech’s Bright Future
It’s still early days for RegTech. However, anyone who’s watched the FinTech (financial technology) sector mature over the past decade knows that the future looks bright. There’s an extraordinary potential for RegTech tools to reshape regulatory compliance in the financial industry. The need for compliance solutions will grow in tandem with mounting regulation, to harness breakthroughs in AI and machine learning, and to respond to emerging business and customer service models.