The Importance of RegTech in Banking

Ashish M. Shaji

27 Nov, 2020

Regulatory Technology (RegTech) has begun to gain momentum in the fintech and banking industry. It has helped significantly in managing compliance costs and also has created opportunity to get a competitive advantage apart from delivering customer-centric innovations. We are looking at the importance of Regulatory Technology in banking but before that we must understand its meaning.

What is RegTech?

Regulatory Technology, popularly known as RegTech, is the application of emerging technology which helps in improving the way how businesses manage regulatory compliances.  It is still in its nascent stage but is maturing rapidly.

These companies are now engaging machine learning, natural language processing, AI and other technologies to bring digital transformation in regulatory compliance.

What is the need for RegTech in banking?

The banking sector has been burdened with regulations from a long time. With a view to reduce this vast and epic burden on banking institutions, they are beginning to turn to new technology solutions. If you look around the world, you would find that financial sector has been undergoing regulatory changes like never before.  It becomes quite a task to adjust with huge amount of new regulatory changes as it imposes high complexity as well as stringent timelines.

Regulatory Technology established a strong foundation within the Fintech ecosystem to overcome the challenges. It has come up with solutions that take care of new and complex regulations, litigation and other regulatory areas of concern faced by banking institutions

The present legacy solutions used by banks are not good enough to meet the stringent requirements implemented by the regulators. Therefore Regtech in banking provides a seamless way for banks to meet these needs without actually overhauling their existing models. Regtech is expected to facilitate compliance management in banking and also minimize the regulatory risks.

RegTech in banking: How can it be used?

There are different ways how Regulatory Technology can be used in banking.

 Some of the ways are discussed below:

• Regulatory Reporting

It can enable distribution of data and regulatory exposure through big data analytics and real time reporting.

• Identity Management and Control

RegTech can be used in facilitating counterparty due diligence and KYC procedures, Anti-money laundering and anti-fraud screening thereby helping in identity management and control.

• Risk Management

It can be further used to detect compliance and regulatory risks, assess risk exposure and also anticipate future threats.

• Transaction Monitoring

It can provide solution for real time transaction monitoring and auditing thereby leveraging the benefits of distributed ledger through Blockchian technology.

What has caused the adoption of RegTech in Banking?

There are certain challenges faced by the financial institutions which can be handled well by partnering with RegTechs. Some of these challenges or uncertainties are mentioned below which has caused the adoption of Regulatory Technology.

• Frequent addition of new financial regulations by the government;
• Amendments and modifications on existing regulations;
• Huge overhead costs in production and deployment of solution to comply with the regulations;
• Massive penalties being levied on non-compliance with regulations;
•  Limitations of legacy systems and lack of automation and digitization to satisfy the demands of regulatory changes;
•  Issues arising due to incompatible systems and non-standardized approach.

These challenges are poised to become more and more complex with passage of time therefore it is the need of the hour for financial institutions to have a long term, technology driven platform in order to bring about end to end governance and proper regulatory compliance.

Benefits of using RegTech in banking

Regulators are expecting banks and financial institutions to be more active than before in terms of detecting, preventing and remediating compliance issues through their own.

By leveraging RegTech, banking and financial institutions can enjoy the following benefits:

• Streamline operational processes;
• Integrate solutions reasonably quicker;
• Remain compliant with regulations;
•  Simplify data management and reporting;
• Real time reporting;
• Reduce the time for client on boarding;
• Identify frauds; and
• Improve on data collection and data analytics.

How can RegTech help in Fraud and Risk Management?

Risk management solutions allow automated credit assessments to know optimal exposure and limits. Partnering with the RegTech can deliver cost saving and increased return of capital with all compliance and regulatory requirements.

RegTech systems assist in risk management support risk data aggregation for capital planning and liquidity reporting. RegTech solution, in KYC, real time Anti money laundering screening, Artificial Intelligence and Machine learning- based fraud prevention, had the most number of adoption by banks. Other areas that are stimulating interest includes cloud computing for data standardization, predictive analytics for advanced risk management and end to end automation regulatory reporting. 

There are numerous RegTech tools that protect against different types of risk like market abuse, cyber attacks and fraud. They monitor systems and alert personnel in case of suspicious activity detection. RegTech help banks to detect hidden frauds within numerous amounts of transactional and organizational data.

What are the different technologies that are supporting RegTech solutions?

Some of the main technologies that are supporting RegTech solution are as follows:

• Big Data;
• Blockchain;
• Machine Learning;
• Virtualization;
• API;
• Data Mining and Analytics;
• Cloud Computing; and
• Artificial Intelligence^[1].

Conclusion

Read our article:Evolution and Growth of Digital Banking in India