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Vineet Tyagi is Global CTO, Biz2X .
Financial institutions (FIs) and FinTechs have collaborated on a number of business-related initiatives during the past few years. While customer-facing areas receive the majority of attention, businesses have recently begun paying attention to back-end aspects as well. RegTech has emerged as a significant subset within the FinTech ecosystem as a result of intense pressure from regulators on overall data compliance and control. Partnerships between FI and FinTech to exploit intriguing use cases may occur in the upcoming years.
Need for RegTechs
There have always been many regulations in the financial services industry. Financial institutions are beginning to look to innovative technological solutions in an effort to lessen the immense and continuously growing weight of these legal requirements. Financial industry regulations are changing at an incredible rate all across the world. Financial institutions are required to meet strict deadlines and high levels of complexity in order to deal with the sheer volume of new regulatory changes. Regulators have encouraged financial institutions to modernise their companies on numerous occasions during the past ten years, but many of these organisations have had difficulty with these regulatory-driven changes.
In order to overcome this and develop solutions aimed at new and complex regulations, litigation, and regulatory remediation areas faced by financial institutions (FI), as well as an overall reduction in compliance costs, regulatory technology (RegTech) established a strong foundation within the FinTech ecosystem. More than 1600 enterprises globally offer a range of services and solutions to help other companies with their compliance requirements.
Challenges financial institutions (FIs) are facing
Financial institutions (FIs) face a variety of difficulties in managing risks, including frequent additions of financial regulations by governments, circulars and modifications of existing regulations, high overhead costs for production and deployment of solutions to comply with the regulation, a high levitation of penalties for non-compliance with the regulation, limitations of legacy systems, and insufficient automation and digitisation to keep up with regulatory changes.
They can be better equipped to address these risks by collaborating with RegTechs, who have open frameworks and laser-focused expertise. RegTech offers a practical answer to these regulatory difficulties by digitising and automating operations.
Role of RegTech in the transformation of financial services
It’s crucial to provide reliable FinTech solutions that incorporate RegTech innovation for sustainable financial products with regulatory process automation security.
Financial institutions (FIs) are intricately crafted legal entities with a wide range of business models, indicators, and risks. RegTech gives financial institutions (FIs) the capacity to administer policies and procedures effectively, analyse compliance, and provide internal control and accountability for risk data. The key benefits include:
– Maintaining compliance with the law
RegTechs make it easier and more effective for financial institutions (FIs) to comply with regulatory standards. They take initiative in utilising new and developing rules, comprehending what-if scenarios, and enabling strong remedies by working on the regulatory environment. It aids in reducing the time required for client onboarding, identifying fraudsters, hastening the adoption of new rules, and increasing data collection and analytics.
– Simplifies data management
In recent years, data growth has been exponential. For improved insights, financial institutions (FIs) have been examining ways to consume both structured and unstructured data. Strategic data management techniques are needed for regulations like the storage of Aadhaar data and the localization of data storage. It requires a lot of computational power to save and analyse, as well as compliance with a lot of rules and regulations from regulating organisations.
Banks must keep, access, and process data on a scale that was never anticipated in order to meet regulators’ expectations. Banks and brokers are being compelled by new laws to approach data infrastructure more front-to-back. Data sets must be comprehensive and precise, and their contents must be considerably more easily accessed, displayed, and modified than in the past, with various latencies and for various reasons. Data-driven RegTech solutions will increase the effectiveness, openness, and value of regulatory filings for everyone who creates, gathers, and uses them.
– Reporting in real time
RegTech has the potential to fundamentally alter the compliance process and support financial institutions’ need for real-time data analysis. RegTechs may analyse in a variety of ways, including scenario analysis, regulatory ecosystem analysis, and real-time user engagement analysis globally, thanks to advanced data analytics. This helps businesses proactively identify risks, concerns, and opportunities.
– Decision-making and data analytics
Predictive analytics is a long-term potential of RegTech for risk management. The core reason of a regulatory breach can be evaluated by predictive analytics, which can then be used to forecast future risk factors or compliance problems. Additionally, it is helpful for risk modelling. Artificial intelligence and cloud computing developments may increase the utility of RegTech solutions.
– Reframing regulations and establishing new governance
RegTech solutions make it possible to quickly and accurately automate end-to-end regulatory compliance solutions that are future-proof and versatile so that they can easily meet both current and future standards. It acknowledges that compliance continues to have a soft or human aspect. Through data analytics and systemic problems in human operations, this risk-based approach to compliance by design identifies regulatory risk. Companies can quickly detect risk and improve the efficiency of the front office by approaching compliance holistically.
– Fraud and risk control
Automated credit assessments can understand the best exposure and restrictions thanks to risk management systems. Contrarily, working with RegTech solutions can result in cost savings, a higher rate of return on investment, as well as meeting all regulatory and compliance requirements. RegTech systems in risk management support risk data gathering for modelling, scenario analysis, forecasting, and stress testing as well as capital planning and liquidity reporting.
Banks have utilized RegTech solutions most widely in the areas of know your customer (KYC), real-time AML screening, AI/ML-based fraud prevention, and real-time compliance monitoring.
Summing up
RegTech has advantages for both businesses and regulators. For the financial industry, it can enable financial institutions to better manage costs and risks, free up extra regulatory capital, and open up new opportunities for FinTech start-ups, consultancy firms, and software companies. For regulators, it enables the creation of systems for continuous monitoring to spot issues as they arise and shorten the duration of compliance violation investigations.
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Views expressed above are the author’s own.
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