What Is RegTech?

Imagine a model comprising AI, ML, blockchain, cloud computing, big data, and smart contracts overloaded with spices of automation.

Isn’t it sounding too classy and something overwhelming?

Yes, it is regtech that we will be discussing from A to Z.

What Is RegTech?

The financial industry’s regulatory processes are managed by technology, which is referred to as regtech. Regulatory technology primarily aims to monitor, report, and ensure compliance with regulations. Predictions show that the worldwide RegTech industry would expand from an initial value of $7.6B in 2021 to $19.5B in 2026, a CAGR (Compound Annual Growth Rate) of 20.8%.

A group of tech businesses known as regtech uses automation to solve problems that arise in a tech-driven economy. Fraudulent actions such as data breaches, cyber intrusions, and money laundering have become more common with the proliferation of digital products.

By providing data on money laundering activities carried out online, regtech mitigates the risk to a company’s compliance department. This is especially helpful since traditional compliance teams may be unaware of these activities due to the proliferation of underground marketplaces on the Internet. By keeping tabs on all online purchases in real time, regtech tools can spot any problems or anomalies in the world of digital payments. The financial institution is notified of any unusual occurrence so that it can investigate and possibly detect fraudulent conduct. If financial institutions can see possible dangers to their cash and data quickly, they can lessen the likelihood of losses and the expenses that come with them.

Read: 50 Popular Fintech Companies You Should Know

Top 10 RegTech Players

1. Chainalysis

2. ComplyAdvantage

3. Ascent Regtech

4. Forter

5. Hummingbird

6. Mitratech

7. Trunomi

8. SymphonyAI

9. Sift Science

10. Elliptic

How RegTech Works?

Below is a graph sourced from Deloitte that illustrates how Regtech compliance utilizes many state-of-the-art technologies, including:

Artificial intelligence, including machine learning
Big data analytics
Blockchain and smart contracts
Cloud computing
Voice and text recognition

‍Financial institutions can save time, money, and staff by utilizing these technologies to lessen the burden of complying with anti-fraud and AML rules. Here is an overview of how Regtech impacts many aspects of a financial institution’s operations:

Step 1: Onboarding

New financial clients must have their identities confirmed and their risk of financial crime assessed before they may be accepted. Automating client onboarding and learning from past case management data to detect identification abnormalities reasonably accurately are both possible with Regtech applied to identity verification.

Step 2: Monitoring

A financial institution’s monitoring efforts extend beyond the tracking of internal transactions and consumer risk profiles. Additionally, it entails monitoring staff for potential internal risks, verifying any new regulations, reviewing sanctions lists for any information that could affect the risk levels of clients, and analyzing market dynamics for any emerging financial crime schemes.

Step 3: Detection

Banks and other financial institutions must be able to detect red flags in customer transactions that could indicate fraudulent or otherwise unlawful activities. Because crooks are always thinking of new strategies, this is usually more difficult than it sounds.

By analyzing past warnings and instances, regtech using AI, particularly white-box machine learning, can create algorithms to identify (or even anticipate) which transactions are likely to involve illicit conduct.

Step 4: Reporting

Maintaining records of incidents and responses is an important aspect of an effective AML compliance program. When attempting to identify, anticipate, or manage questionable transactions, these records can be used as a reference or even to train machine learning models. Conversely, they provide a “paper trail” that can be utilized to demonstrate to regulatory bodies the implementation and adherence to a compliance program.

By automating tedious document management tasks, regtech can be of assistance in this regard. Consequently, reports are prepared, sent, and deleted at the exact moment they are required, be it for training or compliance purposes.

Step 5: Process control

All of the aforementioned procedures become more streamlined and uniform when Regtech is used for risk management. Scaling up a financial institution to handle higher velocities and volumes of information is made easier, and compliance is made easier as well. This prevents risks from falling through the gaps.‍

Pros of Regtech

The financial Regtech applications discussed above provide several benefits to institutions.

Adaptable regulatory compliance: Keeping up with all the standards can be a real challenge for financial institutions, particularly for organizations operating in multiple jurisdictions, due to the fast-paced nature of financial regulation. Financial institution teams can benefit from regtech by keeping up with the most recent rules and updating their tech stack to meet current compliance standards.
Automated compliance tasks: When performed mainly manually, essential anti-money-laundering (AML) tasks, particularly those about “Know Your Customer,” can eat up a lot of resources, including employees’ time and the money they’re paid for it. By using Regtech to automate KYC, we can reduce the likelihood of human error and free up those personnel to focus on higher-priority activities.
Better customer experience: Experience that is better for the customer: There needs to be a careful balancing act when onboarding new financial customers between requesting sufficient identification to confirm their identity and making the process easy enough that they won’t leave halfway through. By integrating data from many sources, Regtech helps to eliminate duplicate client ID verification processes and guarantees adequate client Due Diligence.‍
Increased transparency: Customer activity reports can be more coherent and created more often, thanks to Regtech automating transaction monitoring and other KYC processes, which also centralizes and aligns data, leading to more transparency. In addition to providing more up-to-date insights, this also helps financial institutions gather additional evidence of their compliance program’s effectiveness in preparation for audits.

What questions should I ask a RegTech vendor that leverages “AI”?

What kinds of AI technologies do you use, and why?

You should familiarize yourself with the fundamentals of machine learning and natural language processing before responding to the vendor. An excellent vendor will be able to explain their method in a manner that any company leader can comprehend, so you don’t need to be an AI expert. You must understand how the technologies and methodologies in question contribute to the value creation for your company. Does the provider truly incorporate “AI” into their product, or is it just a marketing buzzword?

Where are you getting the data that is training your algorithms?

The saying goes something like, “bad in equals bad out,” and good AI systems necessitate large quantities of high-quality data. To ensure that you have access to the most current information, the vendor should be able to explain how they are ingesting regulatory text. For example, did they build an ingestion or scraping tool, or are they white-labeling another product? Ideally, they should be pulling straight from official regulatory websites. Additionally, they should be able to tell you at what frequency this is happening. Also, make sure the vendor can walk you through their quality-assurance process to make sure all the data points you need are gathered correctly.

Are there humans involved in the training of your algorithms, and to what degree?

Many sectors view the idea of humans-in-the-loop as a red flag since it implies “that the tool isn’t AI.” This suggests that technology is not entirely driven by machines; humans are still participating in the process. A humans-in-the-loop procedure is seen as a plus in the compliance sector, which is unique. Why? Due to the intricate nature of regulatory compliance, AI solutions are greatly enhanced when taught and quality-assisted by human specialists in the field of law and regulations. While it’s true that not all AI-driven RegTechs benefit from having humans in the loop, it’s important to ask the vendor why they choose to include or exclude humans.

Who is held liable if your solution fails?

Both you and the vendor should take the time to carefully consider this question. Any potential new solution, whether involving AI or not, must be carefully considered because this matter is in legal limbo. A reliable AI provider will get the gravity of the situation, demonstrate a solid model risk management framework, implement stringent internal controls, and—most importantly—be forthright about the solution’s capabilities and limitations. Anything that seems too wonderful to be true most likely is.

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The RegTech Revolution

This image has been taken from KPMG. The birth of RegTech occurred at the crossroads of the impending regulatory load and the ascent of AI. When first approached, the financial services sector viewed RegTech with reasonable skepticism. Despite the allure of the solutions offered by RegTech companies, the realm of regulatory compliance is enormous, intricate, and error-prone. Before financial corporations would be prepared to put their money into RegTech startups, they would need to demonstrate that their ideas were effective. This is when financial backers became involved. Their valuation of the prospect was high enough that they were prepared to put money into making it a reality.

It transpires to be quite a bit of money. Also, in a flash.

Which Industries Use RegTech?

A wide range of businesses rely on RegTech solutions to meet their regulatory compliance requirements. Financial institutions like banks, investment businesses, and payment service providers are at the top of the list because of the substantial risk of illicit behavior they face. Healthcare, casinos, law firms, and insurance companies are among the high-risk industries that depend on RegTech to guarantee compliance with applicable legislation.

Not only do these high-risk sectors use RegTech solutions to increase efficiency and compliance, but so do a wide range of financial services providers, including fintech companies. The need for RegTech solutions has grown in the financial services industry due to the proliferation of regulations and the necessity of monitoring compliance in real-time.

To further improve monitoring and streamline the regulatory process, authorities are also using RegTech solutions. Regulators can streamline compliance monitoring and quickly identify hazards by automating operations and leveraging modern analytics and machine learning technology.

Future of RegTechs

In response to the difficulties encountered by financial sector organizations, such as banks and other lending institutions, a new sector known as RegTech is springing up. The expenses of guaranteeing compliance can become unmanageable if the number of regulations keeps growing. However, RegTech has a lot of options that can increase transparency and efficiency while decreasing these expenses.

Offering tech-driven answers to compliance problems is a primary goal of the RegTech sector. Among these activities are the real-time execution of audits, risk workflows, and internal compliance procedures. To increase compliance while decreasing costs, these solutions leverage cutting-edge technology, such as cloud-based systems.